In the current economic scenario, RBI has taken several steps to increase liquidity in the system. These steps are: 1. Increase in Marginal Standing Facility (MSF) rate: MSF rate is the rate at which banks can borrow money from RBI overnight. RBI has increased the MSF rate from 8% to 9%. 2. Reduction in Statutory Liquidity Ratio (SLR): SLR is the minimum percentage of deposits that banks have to maintain with RBI in the form of cash or government securities. RBI has reduced the SLR by 50 basis points from 21.5% to 21%. 3. launching ‘Operation Twist’: Under this operation, RBI will buy government securities of up to Rs 10,000 crore with maturities of up to three years and simultaneously sell government securities with maturities of up to six years for an equivalent amount. This will increase the supply of money in the system and reduce borrowing costs for banks. 4. Introduction of ‘targeted long-term repo operations’ (TLTRO): Under TLTRO, RBI will provide funds to banks at a fixed rate for a period of three years. The objective of TLTRO is to
RBI to infuse Rs 1 lakh crore through G-sec purchase
The Reserve Bank of India (RBI) announced on Friday that it will infuse Rs 1 lakh crore into the economy through the purchase of government securities (G-secs). The move is part of the RBI’s efforts to increase liquidity in the system and to ensure that there is enough money available for banks to lend.
This is the second time this month that the RBI has announced a G-sec purchase program. On October 4, the central bank had said that it would buy G-secs worth Rs 10,000 crore through open market operations (OMOs). The first tranche of the OMO was conducted on October 15 and resulted in the purchase of G-secs worth Rs 6,879 crore.
Friday’s announcement came as a surprise as most analysts were expecting the RBI to leave interest rates unchanged at its bi-monthly monetary policy meeting today.
The RBI has been taking several measures to increase liquidity in the system and to ensure that banks have enough money to lend. In September, the central bank had asked banks to maintain a minimum balance of Rs 1 lakh crore in their current account deposits with it. It also announced a scheme under which banks can borrow up to Rs 1 lakh crore from the RBI at a discounted rate of 0.25%.
RBI to conduct variable rate reverse repo operations of Rs 1 lakh crore
RBI’s strategies to increase liquidity in Economy
RBI’s liquidity injection measures to increase liquidity in the banking system:
The Reserve Bank of India (RBI) has announced that it will conduct variable rate reverse repo operations of Rs 1 lakh crore on October 9, 2019. Through this move, the RBI intends to provide additional liquidity in the banking system.
This comes after the RBI conducted a similar operation of Rs 1 lakh crore on September 30, 2019. The RBI had then said that the move was aimed at “providing temporary relief to banks experiencing tightness in funding conditions”.
In its latest announcement, the RBI said that it will conduct these variable rate reverse repo operations under the Liquidity Adjustment Facility (LAF) for a duration of 7 days. The LAF is a monetary policy tool used by the RBI to regulate short-term money supply in the economy. Under the LAF, banks can borrow funds from the RBI through repurchase agreements (repo). In a reverse repo transaction, banks deposit securities with the RBI and receive funds in return.
The RBI stated that all scheduled commercial banks (excluding regional rural banks and small finance banks), primary dealers and registered non-banking financial companies are eligible to participate in these variable rate reverse repo operations.
Through these variable rate reverse repo operations, the RBI aims to provide additional liquidity support to banks and ease funding pressures. This is expected to help improve credit flow to businesses and boost economic activity.
RBI to conduct Operation Twist
The RBI has announced that it will be conducting an operation twist in order to increase liquidity in the economy. This move comes after the recent announcement of a repo rate cut by the RBI. The operation twist will involve the RBI selling short-term government securities and using the proceeds to buy long-term government securities. This will help to reduce the yield curve and make long-term borrowing more attractive for companies. The RBI has also said that it will continue to use other measures such as open market operations and variable rate repos to manage liquidity in the system.
RBI to issue GoI bonds worth Rs 1.2 lakh crore
The RBI has decided to issue GoI bonds worth Rs 1.2 lakh crore to increase liquidity in the economy. This move comes after the government announced a Rs 2.11 lakh crore stimulus package to boost the economy. The RBI will purchase these bonds from the secondary market and will hold them till maturity. This will provide a liquidity of Rs 1.2 lakh crore to the market.
RBI’s other measures to increase liquidity
The RBI has adopted a series of measures to increase liquidity in the economy. These include:
- Conducting open market operations (OMOs): The RBI buys/sells government securities from/to banks with an aim to regulate the money supply in the economy. This injects/absorbs liquidity into/from the system, as required.
- Reduction in Cash Reserve Ratio (CRR): The CRR is the percentage of deposits that banks are required to maintain with the RBI in the form of cash. A reduction in CRR releases additional funds with banks, which they can use for lending purposes, thereby increasing liquidity in the system.
- Cut in Statutory Liquidity Ratio (SLR): The SLR is the percentage of deposits that banks have to maintain in the form of government securities. A cut in SLR releases additional funds with banks, which they can use for lending purposes, thereby increasing liquidity in the system.
- Liquidity Adjustment Facility (LAF): Under LAF, RBI provides overnight as well as term funding to banks against their eligible securities. This helps banks tide over temporary mismatches in their asset-liability positions and manage their liquidity requirements more effectively.
- Marginal Standing Facility (MSF): MSF is a facility under which scheduled commercial banks can borrowing overnight funds from RBI against their approved government securities at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks
Conclusion
RBI has adopted several strategies to increase liquidity in the economy and these have been largely successful. The RBI has increased the repo rate which has helped to reduce the cost of borrowing for banks and other financial institutions. It has also implemented the Marginal Standing Facility (MSF) which allows banks to borrow funds from RBI at a higher rate than the repo rate. Overall, these measures have helped to increase liquidity in the economy and have been effective in stabilizing it.