Context:
Reserve Bank of India (RBI) has announced measures to inject over Rs 1.5 lakh crore to increase money liquidity in the economy.
RBI’s Liquidity Measures:
- Money Liquidity – Refers to the availability of cash and easily accessible funds in the economy, influencing spending and investment.
- Indicates how quickly and easily an asset can be converted into cash without significantly impacting its price.
- Reason for Liquidity Shortfall –
- RBI’s forex sale to stabilize the rupee amid foreign institutional investors (FIIs) outflows led to a liquidity deficit.
- RBI sells US dollars in exchange for rupees, reducing the supply of rupees in the banking system.
- This led to tighter short-term interest rates and increased borrowing costs.
Measures Taken by RBI:
- Government Bond Buyback –
- The central bank or government repurchases bonds from the market before maturity.
- Injects liquidity by paying bondholders (banks, financial institutions, or investors), increasing fund availability in the banking system.
- Repo Auction:
- A liquidity adjustment tool where banks bid for funds at desired borrowing rates.
- RBI accepts the lowest bids until the required amount is allotted.
- US Dollar-Rupee Swap Auction:
- Increases liquidity by facilitating the temporary exchange of currencies or financial instruments.
- Borrowing dollars stabilizes the domestic currency and prevents a liquidity drain by avoiding rupee sales in the forex market.
Source: TOI
Previous Year Question
If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do?
1. Cut and optimize the Statutory Liquidity Ratio
2. Increase the Marginal Standing Facility Rate
3. Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below:
[UPSC Civil Service Exam – 2020 Prelims]
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: (b)