Skip to main content

Which are the monetary policy instruments used by RBI?

Monetary policy is a policy of central bank of the country (for India, its RBI) whereby it aims to control the money supply in the country to manage inflation and promote growth. RBI uses various instruments to manage liquidity in the system with the objective to achieve the desired level of inflation and growth.

Which are the monetary policy instruments used by RBI?

Repo Rate – Repo rate or policy repo rate is a rate at which banks borrow funds from RBI against a collateral of approved government and other securities.

Reverse Repo Rate – Reserve repo rate is the rate at which banks can park their surplus liquidity with RBI against a collateral of approved government securities. 

Standing Deposit Facility (SDF) – SDF rate is the rate at which banks can park their surplus liquidity with RBI without the collateral of government securities.

Marginal Standing Facility (MSF) – MSF rate is the rate at which banks can borrow funds from RBI by dipping up to 2% into their Statutory Liquidity Ratio (SLR) securities. For eg. if the SLR is 18%, banks can use 2% of the SLR securities to borrow funds from RBI at MSF rate and maintain SLR at 16%. 

Liquidity Adjustment Facility (LAF) – LAF consists of repo, reverse repo, SDF and MSF.

Bank Rate – Bank rate is a rate at which RBI is ready to buy / rediscount bills of exchange or other commercial papers. 

Cash Reserve Ratio (CRR) – CRR is the percentage of its Net demand and time liabilities (NDTL) of second preceding fortnight, which the bank is required to maintain with RBI under section 42(1) of Reserve Bank of India Act, 1934.

Statutory Liquidity Ratio (SLR) – SLR is the percentage of its Net demand and time liabilities (NDTL) of second preceding fortnight, which the bank is required to maintain in safe and liquid assets, such as, unencumbered government securities, cash and gold under section 24 of Banking Regulation Act, 1949.

Open Market Operations (OMOs) – OMOs involve outright purchase and sale of government securities by RBI, to inject and absorb durable liquidity.

Market Stabilisation Scheme (MSS) – Under MSS, the surplus liquidity of a more enduring nature arising from large capital inflows, is absorbed through sale of short-dated government securities and treasury bills. The cash so mobilised is held in separate government account with RBI.


References

Reserve Bank of India. (2018, January 15). 'Functions and Workings of RBI'. Retrieved from https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RWF15012018_FCD40172EE58946BAA647A765DC942BD5.PDF

Reserve Bank of India. (n.d.). 'Monetary Policy - Overview'. Retrieved from https://rbi.org.in/scripts/FS_Overview.aspx?fn=2752


Follow at - Telegram   Instagram   LinkedIn   Twitter

Labels:

Comments

Post a Comment

Popular Posts

Credit Cards and Debit Cards

Reserve Bank of India (RBI) has issued directions on issuance of credit cards and debit cards. To whom are the directions applicable? The directions are applicable to the following Regulated Entities (REs) – Commercial Banks  Small Finance Banks (SFBs) Regional Rural Banks (RRBs) Primary (Urban) Co-operative Banks (UCBs) Non-Banking Financial Companies (NBFCs) for all layers – NBFC-Investment and Credit Companies (NBFC-ICC) NBFC-Factor  NBFC-Micro Finance Institutions (NBFC-MFI)  Housing Finance Company (HFC)  What is a credit card? Credit Card is a physical / virtual payment instrument issued with a pre-approved revolving credit limit that can be used to purchase goods and services or draw cash advances. What is a debit card? Debit Card is a physical / virtual payment instrument linked to a Savings Bank / Current Account which can be used to withdraw cash, make online payments, do Point of Sale (PoS) terminal / Quick Response (QR) code transactions, fund transfer, e...
Post a Comment
Read more

Deposits between a person resident in India and a person resident outside India

Reserve Bank of India (RBI) has updated the regulations on deposits between a person resident in India and a person resident outside India. What are the restrictions on deposits between a person resident in India and a person resident outside India? No person resident in India shall accept any deposit from, or make any deposit with, a person resident outside India. However, the following deposits are exempted – Deposits held in rupee accounts maintained by foreign diplomatic missions and diplomatic personnel and their family members in India with an authorised dealer. Deposits held by diplomatic missions and diplomatic personnel in special rupee accounts namely Diplomatic Bond Stores Account to facilitate purchases of bonded stocks from firms and companies who have been granted special facilities by customs authorities for import of stores into bond. The funds in the account may be repatriated outside India without the approval of the RBI. Deposits held in accounts maintained in foreig...
Post a Comment
Read more

Credit Derivatives

Reserve Bank of India (RBI) has issued directions on credit derivatives. What is Credit Derivative? Credit derivative means a derivative contract whose value is derived from the credit risk of an underlying debt instrument or an index of underlying debt instruments. What is Credit Default Swap (CDS) and Total Return Swap (TRS)? Credit Default Swap (CDS) means a credit derivative contract in which one counterparty (protection seller) commits to pay to the other counterparty (protection buyer) in the case of a credit event with respect to a reference entity and in return, the protection buyer makes periodic payments (premium) to the protection seller until the maturity of the contract or the credit event, whichever is earlier. Total Return Swap (TRS) means a credit derivative contract under which one counterparty (total return payer) commits to transfer the entire economic performance of a reference asset to the other counterparty (total return receiver), and, in return, receives a pre-d...
Post a Comment
Read more

Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)

Reserve Bank of India (RBI) has issued the directions on maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) by banks. To whom are the directions applicable? The directions are applicable to the following Regulated Entities (REs) – Commercial Banks  Small Finance Banks (SFBs) Payments Banks (PBs) Local Area Banks (LABs) Regional Rural Banks (RRBs) Primary (Urban) Co-operative Banks (UCBs) Rural Co-operative Banks – State Co-operative Banks (StCBs) District Central Co-operative Banks (DCCBs) What is CRR? Every bank shall maintain in India by way of cash reserve, a sum equivalent to such percent of its Net Demand and Time Liabilities (NDTL) in India, as the RBI in terms of Section 42(1) of the RBI Act, 1934 (for scheduled banks) and Section 18(1) of the Banking Regulation Act (BR Act), 1949 (for non-scheduled banks) [including provisions of Section 18(1) of the BR Act as applicable to co-operative banks], may specify. What is incremental CRR? In terms of Secti...
Post a Comment
Read more

Special Rupee Vostro Accounts (SRVAs)

Reserve Bank of India (RBI) has consolidated the guidelines governing Special Rupee Vostro Accounts (SRVAs). Who can open and maintain Special Rupee Vostro Accounts (SRVAs)? Authorised Dealer (AD) banks in India may open Special Rupee Vostro Accounts (SRVAs) of its branch outside India or a bank resident outside India. Which transactions can be settled through SRVA? The settlement of cross-border trade transactions through SRVA is an additional arrangement for invoicing, payment and settlement of exports and imports in Indian Rupee (INR).  All permissible capital and current account transactions under Foreign Exchange Management Act (FEMA) may be settled through the SRVA.  AD banks maintaining SRVA are permitted to open additional current account for exporter / importer, exclusively for settlement of export / import transactions. What can be the source and use of funds in SRVA? SRVA may be funded by way of inward remittances or transfer from other repatriable INR accounts in t...
Post a Comment
Read more