MONPOLICY → QUANT TOOLS → RATES → LAF REPO Flashcards
What is the Marginal Standing Facility (MSF)?
The MSF allows scheduled commercial banks to borrow overnight funds from the Reserve Bank of India (RBI) by pledging a portion of their excess Statutory Liquidity Ratio (SLR) quota government securities.
How does the MSF rate compare to the repo rate?
The MSF rate is generally 1% higher than the repo rate. This makes borrowing through the MSF a more expensive option for banks.
When do banks tend to turn to the MSF for borrowing?
Banks typically use the MSF when they’ve exhausted other short-term borrowing options, such as utilizing the repo window. It serves as a last resort in case of urgent liquidity needs.
Describe a repo (repurchase option) transaction.
A repo transaction involves banks using government securities as collateral to borrow short-term funds from the RBI. Banks can pledge both SLR quota and non-SLR quota securities for repo transactions.
What role does the repo rate play in monetary policy?
The repo rate is a key monetary policy tool used by the RBI to control liquidity within the banking system. By adjusting the repo rate, the RBI influences the flow of money and interest rates in the broader economy.
Explain the relationship between repo loans, MSF loans, and government securities.
Both repo and MSF loans rely on government securities as collateral. Banks can use both their SLR quota and (for repos only) non-SLR quota securities. The RBI uses repo and MSF as tools to manage liquidity, with the MSF typically offered at a higher interest rate to discourage regular use.
What is the purpose of the Liquidity Adjustment Facility (LAF) in the Indian banking system?
The LAF enables the Reserve Bank of India (RBI) to manage short-term liquidity for banks. It provides a mechanism for banks to borrow funds for immediate needs or to park excess cash with the RBI, ensuring smooth banking operations.
Describe the Repo Window within the LAF.
The Repo Window is the primary tool within the LAF. It allows banks to borrow short-term funds (overnight to 14 days) from the RBI by using government securities (SLR and non-SLR quota) as collateral. The interest rate here is the repo rate, a key monetary policy tool for the RBI.
Explain the role of the Marginal Standing Facility (MSF) in the LAF.
The MSF serves as a “last resort” for banks needing immediate liquidity. They can borrow overnight funds from the RBI, but only by pledging their SLR quota government securities. The MSF rate is deliberately higher than the repo rate to encourage banks to use other borrowing options first.
How does the Special Drawing Facility (SDF) differ from the traditional LAF windows?
While mentioned in the context of LAF, the SDF is a separate tool used for a specific purpose. It allows banks to borrow foreign currency from the RBI against government securities or other approved collateral. The SDF is mainly used to manage temporary imbalances in the foreign exchange market and ensure stability.
Why do the Repo Window and the MSF have different interest rates?
The Repo Window offers a lower interest rate (the repo rate) for borrowing compared to the MSF. The higher MSF rate discourages banks from relying on it regularly and encourages them to manage their liquidity proactively, using the repo window or other borrowing options first.
What is the Liquidity Adjustment Facility (LAF)?
Monetary policy tool used by the Reserve Bank of India (RBI)
Enables banks to borrow short-term funds from the RBI or lend surplus funds to the RBI
Helps manage liquidity and economic stability
What is the Repo Rate?
The interest rate the RBI charges when lending short-term funds to banks
Uses government securities (G-Secs) as collateral
Banks agree to repurchase those securities at a future date and predetermined price
Key tool for controlling inflation
What is the Reverse Repo Rate?
The interest rate banks earn when they park surplus funds with the RBI
The RBI provides G-Secs as collateral
Generally lower than the Repo Rate
How does the RBI use the LAF to manage the money supply?
Increase Repo Rate: Discourages borrowing, reduces money supply, can help control inflation
Decrease Repo Rate: Encourages borrowing, increases money supply, can stimulate economic activity
