Economy
Quantitative Measures of RBI to control Liquidity
1)Bank Rate:
Banks and Financial institutions borrow a long-term loan from RBI without any collateral for a particular interest rate. This interest rate is called Bank Rate.
2)Repo Rate:
Banks and Financial institutions borrow a short-term loan from RBI using Government Security Bonds as a collateral at a certain interest rate. This interest rate is called Repo rate .
3)Reverse Repo rate:
RBI borrows a short term loan from banks and financial institutions using Government security bonds as a collateral at a certain interest rate. This interest rate is called Reverse Repo rate.
4)Cash Reserve Ratio:
Banks are supposed to deposit a certain percentage of their NDTL as a reserve in RBI. This certain percentage of NDTL is called Cash Reserve Ratio.
5)Statutory Liquidity Ratio:
Banks and Financial institutions are supposed to hold a certain percentage of NDTL with them as a Reserve in the form of cash, gold and Government Security bonds. This certain percentage of NDTL is called as Statutory Liquidity Ratio.
6)Marginal Standing Facility:
It is a window for Banks to borrow from RBI under emergency situations when their Liquidity dries up to zero. Here,the banks can only borrow upto a limit of 2% of their NDTL and they will be charged with an interest rate( penal rate) higher than that of Repo and Reverse Repo rates.
7)Open Market Operations:
The buying and selling of Government Security Bonds by the Government through the Central Bank ( RBI) to control money flow in the banking system is called Open Market Operation.
Selling of G-secs decreases Liquidity in the Economy and buying of G-secs decreases the Liquidity in the Economy.
Open Market Operations are Government Borrowing for spending them in Social sector.
There are no conditions of purchase unlike Repo or Reverse Repo .
8)Market Stabilisation Scheme:
It is a fiscal( GoI) cum monetary( RBI) instrument introduced in the year 2004.
It's objective is to absorb excess Liquidity in the Economy through short- dated Government Securities and Treasury bills.
It is kept in a separate account by RBI. The interest is paid by the Ministry of Finance ( GoI) as a part of Union Budget.
9)Standing Deposit Facility Scheme ( SDFS):
It was introduced in the Union Budget 2018-19 by amending the RBI act of 1934.
It helps RBI to manage Liquidity in a better way during times like demonitisation.
Qualitative Tools of RBI to control Liquidity
1)Rationing of Credit:
1st used by Bank of England
2 types:
Variable Portfolio Ceiling:
Central Bank fixes the ceiling for maximum amount of loans and advances for the commercial banks.
Variable Capital Asset Ratio:
Central Bank fixes the Ratio of the Capital that private banks should have to the total assets of the banks.
2)Direct action
Direct action against the erring banks through increasing the penal rate,refusing financial accommodation etc.
3)Moral Suasion:
Central Bank advises, requests and persuades the commercial banks to abide by its rules.
4)Publicity:
Monetary policy decisions will be publicized through mass media to get public opinion.
5)Regulation of Consumer credit :
Down-payment is regulated in installment schemes .
6)Regulation of Margin Requirements:
Excessive use of credit in stock market because of speculation can be prevented by regulation of the Central Bank.
Content credits: Leo Vishnu Varthan
