Liquidity Control by RBI
- August 13, 2021
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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Liquidity Control by RBI
Subject: Economy
Context: The economy has not yet bounced back to levels where the Reserve Bank of India (RBI) can start draining out the liquidity, Finance Minister Nirmala Sitharaman has said
Concept:
The relationship between the Government and the RBI is both are working as partners to address the issue of the economy. If the RBI and its monetary policy have been keeping the momentum in the right direction, the fiscal side has been taken care of by the Ministry of Finance.
Quantitative Tool | Qualitative tool |
1. Bank rate is the rate at which banks can borrow from the RBI | 1. Rationing of credit: RBI fixes a credit amount to be granted for commercial banks. Credit is given by limiting the amount available for each commercial bank |
2. Cash Reserve Ratio (CRR) – percentage of demand and time liabilities to be kept with RBI by the commercial banks. | 2. Rationing of consumer credit: In this instrument, consumers’ credit supply is regulated through the instalment of sale and hire purchase of consumer goods. Here, features like instalment amount, down payment, loan duration, etc., are all fixed in advance, which helps to check the credit and inflation in the country. |
3. Statutory Liquidity ratio (SLR) – The amount a commercial bank needs to keep in the form of cash, gold and government approved securities (liquid assets) before providing credit to customers (based on percentage of demand and time liabilities) | 3. Moral suasion–It refers to the suggestions to commercial banks from the RBI that helps in restraining credits in the inflationary period. RBI implies pressure on the Indian banking system without taking any strict action for compliance with rules. |
4. Open market operations – buying and selling of government securities with banks to increase or decrease amount of liquidity in the market | |
Repo (repurchase) – Buying of bond by RBI from banks at an interest rate. Reduction of Repo will Increase liquidity in the economy. Reverse repo rate – selling of bonds to banks. This will reduce liquidity in the market | |