6.RBI (Part 2) Flashcards
What is the role of RBI as the lender of last resort?
RBI acts as a lender of last resort, providing financial assistance to banks during times of crisis, ensuring stability in the banking system.
How does RBI control credit/loans in the economy?
RBI controls credit/loans through quantitative and qualitative methods known as credit controllers.
What are some quantitative methods used by RBI to control credit?
1.Repo and Reverse Repo Ratio
2.Cash Reserve Ratio (CRR)
3.Statutory Liquidity Ratio (SLR)
4.Marginal Standing Facility (MSF)
5.Standing Deposit Facility
6.Bank rate
What are some qualitative methods used by RBI to control credit?
1.Rationing of credit
2.Regulating loans for consumption purposes
3.Variation in margin requirements
4.Moral suasion
5.Direct action
What is refinancing?
Refinancing occurs when commercial banks in India utilize government securities to obtain a loan from RBI.
What is the repo rate?
*Repo rate is the rate at which banks avail refinancing facilities from RBI.
*Currently, the repo rate in India is 6.5% per annum.
*Repo stands for ‘Repurchase Option’ or ‘Repurchase Agreement’.
What is Cash Reserve Ratio (CRR)?
*CRR is the average daily balance that banks are required to maintain with RBI as a percentage of their demand and time liabilities (total deposits).
*The current CRR is 4.5%.
*RBI can modify this ratio from time to time.
*CRR is adjusted by RBI to control inflation and manage economic slowdown or recession.
What does RBI do when there is inflation or a slowdown in the economy?
*During inflation, RBI increases the CRR to control excessive money supply.
*During a slowdown or recession, RBI decreases the CRR to encourage lending and stimulate economic activity.
What is the impact of increasing or decreasing the CRR by RBI?
*Increasing the CRR is known as a tight monetary policy.
*Decreasing the CRR is known as an expansionary or liberal monetary policy.
What is the Statutory Liquidity Ratio (SLR)?
*SLR is the percentage of a bank’s net demand and time liabilities (NDTL)/total deposits that it must maintain in the form of cash, gold, and/or government securities.
*Currently, the SLR in India is 18%.
*SLR is regulated under section 24 of the Banking Regulation Act, 1949.
*There is an upper limit of 40% for SLR, but no lower limit.
What is the Standing Deposit Facility (SDF)?
*SDF is the rate at which RBI accepts uncollateralized deposits from banks.
*Implemented by RBI from April 2022 onwards, the current interest rate of SDF is Repo Rate minus 0.25%.
What is the Fixed Reverse Repo Rate?
*The Fixed Reverse Repo Rate is the interest rate at which RBI accepts deposits from banks against collateral of government securities.
*Currently, this rate is fixed at 3.35%.
What are Open Market Operations (OMOs)?
*OMOs are operations conducted by RBI where it buys or sells government securities in order to inject or absorb liquidity from the banking system.
*During inflation, RBI generally sells government securities to absorb excess liquidity, and during a slowdown, it may buy government securities to inject liquidity into the system.
What is Long-Term Repo Operation (LTRO)?
*LTRO is a facility provided by RBI where it offers longer-term loans (1 to 3 years) to banks at the prevailing repo rate.
*By availing LTRO, banks can obtain long-term funds at lower rates, which enables them to reduce interest rates for borrowers and stimulate economic growth.
What is Bank Rate?
*Bank rate is the rate at which RBI is willing to buy or rediscount bills of exchange or other commercial papers.
*It serves as the penal rate charged on banks for shortfalls in meeting their reserve requirements (CRR or SLR).
*The current bank rate in India is repo rate plus 0.25%, which equals 6.75%.
