Monetary Policy Tools (RBI’s Liquidity Management Framework)

Quantitative Tools Qualitative Tools

Short-term Liquidity Margin requirements: Difference between the Loan and
1. 14-day variable-rate repo/ reverse repo auction (Main Operations) Collateral value. Different margin requirements for different
2. Variable Rate Term Repo/ Reverse Repo auction (Tenor: overnight categories of loans (Vehicle, Home, Business etc) to control
and up to 13 days) (Fine tuning Operations) credit to different sectors.
3. Fixed Rate Reverse Repo
4. Marginal Standing Facility (MSF) Consumer Credit Regulation: Rules to set the
5. Standing Deposit Facility (SDF) minimum/maximum level of down-payments and periods of
6. Standing Liquidity Facility (SLF) payments for purchase of certain goods.
Long Term Liquidity
6. Long Term Repo Operations (LTROs) Rationing of credit: Limit the maximum amount of loans and
7. Targeted LTROs (TLTROs) advances for specific categories of loans and advances.
8. Forex Swap ( Buy/Sell Swap and Sell/Buy Swap)
Priority Sector Lending Targets: Ensure loans to Vulnerable
Reserve Requirements sectors in Economy
9. Statutory Liquidity Ratio (SLR)
10.Cash Reserve Ratio (CRR) Moral Suasion: Persuade the commercial banks to co-operate
Market Operations with the general monetary policy.
11. Open Market Operations (OMOs)
12. Market Stabilization Scheme (MSS) Direct Action: Against banks that don’t fulfil conditions and
requirements.
Tool to influence Yield rates
13. Operation Twist
14. G-SAP
 Prelims 2019
Which of the following is not included in the assets of a commercial bank
in India?
(a) Advances
(b) Deposits
(c) Investments
(d) Money at call and short notice
Criteria Savings Account Current Account
Suitable for Salaried people. Businesses, Traders and companies.
However, such accounts can be opened by
Individuals also.
Minimum Balance Comparatively lower Comparatively higher
Interest Interest is paid on deposited amount No Interest is paid on deposited amount
Overdraft available No Yes
Transactions Restricted number of Daily/ Monthly Transactions No Restrictions on number of transactions
 Criteria CRR SLR
Legal Framework RBI Act, 1934 (Scheduled Banks) BR Act, 1949 ( For both Scheduled and Non-Scheduled
BR Act, 1949 (Non-Scheduled Banks) Banks)
Applicability to Commercial Banks, RRBs, Cooperative Banks, Commercial Banks, RRBs, Cooperative Banks, Small
Banks Small Finance Banks, Payment Banks, Local Area Finance Banks, Payment Banks, Local Area Banks
Banks
Applicability to Not applicable to both Deposit Taking and Non- Applicable only to Deposit Taking NBFCs.
NBFCs Deposit Taking NBFCs Not applicable to Non-Deposit Taking NBFCs.
Minimum and No Limit Maximum Limit of 40%
Maximum Limit
Maintained in Cash Cash, Gold and G-Secs
Maintained with RBI Banks
Scope for earning No. Since RBI does not pay interest on CRR Yes. Banks can earn interest on G-Secs. Banks can also
Profits Deposits. earn profits when Gold value appreciates.
Present Rate 4.5% 18%
 Prelims 2015
When the Reserve Bank of India reduces the Statutory
Liquidity Ratio by 50 basis points which of the following is
likely to happen?

(a) India's GDP growth rate increases drastically.

(b) Foreign Institutional Investors may bring more capital
into our country.
(c) Scheduled Commercial Banks may cut their lending
rates.
(d) It may drastically reduce the liquidity to the banking
system.
 Practice MCQ Practice MCQ
Which among the best describes the concept of Net Demand and Which among the following is/are included in the Time liabilities
Time Liabilities (NDTL) of Banks? of the Banks?
(a) Total Deposits with the Banks 1. Fixed Deposits
(b) Net Demand and Time Liabilities of the Banks towards Banking 2. Recurring Deposits
System 3. Time portion of Savings Account Deposits
(c) Net Demand and Time Liabilities of the Banks towards people.
(d) Sum of Net Liabilities towards Banking System and Demand and Select the correct answer using the code given below:
Time Liabilities towards people. (a) 1 only
(b) 1 and 2 only
Practice MCQ (c) 2 and 3 only
Consider the following statements related to Statutory Liquidity (d) 1, 2 and 3
Ratio (SLR) and Cash Reserve Ratio (CRR):
1. The SLR must be maintained with the RBI while the CRR must Practice MCQ
be maintained with the Banks itself. Consider the following statements related to Cash Reserve Ratio
2. Both SLR and CRR must be maintained in the form of Cash, Gold (CRR):
or G-Secs. 1. The CRR is applicable only to Scheduled Banks and not to
3. Unlike SLR, there is no scope for the Banks to earn profits on Non-Scheduled Banks.
CRR deposits. 2. Under the RBI Act, 1934, the CRR cannot be more than 4%.
4. The SLR is usually higher than CRR. 3. The RBI does not pay any interest on CRR Deposits.

Which of the statements given above is/are incorrect? Which of the statements given above is/are incorrect?
(a) 1 and 2 only (a) 1 and 2 only
(b) 1, 2 and 3 only (b) 3 only
(c) 3 and 4 only (c) 2 and 3 only
(d) 1, 3 and 4 only (d) 1 and 3 only
 Practice MCQ
With reference to Targeted Long Term Repo Operations (TLTROs),
consider the following statements: Practice MCQ
1. Unlike the Normal Repos, the Targeted Long Term Repo Which among the following is/are likely objectives of Long-Term
Operations (TLTROs) have longer maturity period. Repo Operations (LTROs) carried out by RBI:
2. The rate of Interest on the Targeted Long Term Repo Operations 1. To inject long term liquidity into the economy at Repo rates.
(TLTROs) is usually higher than Repo Rate. 2. To reduce rate of Interest on long term loans.
3. The liquidity availed by the Banks through this route has to be 3. To enable the Banks to earn more profits.
injected into certain specified sectors.
Select the correct answer using the code given below:
Which of the statements given above is/are correct? (a) 1 only
(a) 1 only (b) 1 and 2 only
(b) 1 and 2 only (c) 1 and 3 only
(c) 1 and 3 only (d) 1, 2 and 3
(d) 1, 2 and 3
 Criteria Repo MSF
Meaning Tool used by the RBI to inject either short- Tool used by the RBI to inject short-term
term or long-term liquidity liquidity on an overnight basis
Rate of Interest Fixed Rate Repo or Variable rate Repo 25 basis points above Repo rate
Tenor Ranges from 1 day to 3 years 1 day
Maximum Limit No Maximum Limit 2% of NDTL
Can Banks use G-Secs which No Yes.
are part of SLR?
What happens during • During Inflation, Repo rate is increased. • During Inflation, MSF is increased.
Inflation and slowdown? • During Slowdown, Repo rate is decreased. • During Slowdown, MSF is decreased.
Criteria Reverse Repo Standing Deposit Facility (SDF)
Purpose Used for sucking out excess liquidity Used for sucking out excess liquidity
Eligible entities Scheduled Banks (including RRBs) Scheduled Banks (including RRBs)
G-Secs as Collateral RBI need to provide G-Secs as collateral to suck RBI need not provide any G-Secs as collateral to
out money from banks suck out money
Maturity Overnight Overnight only.
Up to 14 Days
Available Only when RBI issues notification. Hence, it is at Available everyday. Hence, it is at the discretion of
the discretion of the RBI. Banks.
Provided under RBI Act, 1934 Yes Yes
Limits Min: 5 Crores Min: 1 crore
Max: No Limit Max: No Limit
 Practice MCQ
Which among the following statements is incorrect with respect to
Standing Deposit Facility (SDF)?
(a) The Standing Deposit Facility (SDF) enables the RBI to suck out
excess liquidity from economy.
(b) The G-Secs are not required to be used as collateral under the
Standing Deposit Facility (SDF)
(c) The SDF has replaced Fixed Rate Reverse Repo as floor of the
LAF corridor.
(d) The SDF is lower than Fixed Rate Reverse Repo.
Criteria Standing Liquidity Marginal Standing Repo Reverse Repo Standing Deposit Facility
facility Facility (SDF)
Purpose Used for injecting Used for Injecting Used for Injecting Used for Sucking out Used for Sucking out
money money Money liquidity liquidity
Eligible entities Standalone Primary Scheduled Banks Scheduled Banks Scheduled Banks Scheduled Banks
Dealers (including RRBs) (including RRBs) (including RRBs) (including RRBs)
Primary Dealers Primary Dealers Primary Dealers Primary Dealers
G-Secs as Collateral Standalone Primary Eligible Participants Eligible RBI need to provide G- RBI need not provide any
Dealers need to must keep G-Secs to Participants must Secs as collateral to G-Secs as collateral to
keep G-Secs with borrow loans from keep G-Secs to suck out money from suck out money
RBI to avail loans RBI borrow loans from banks
RBI
Can G-Secs which N/A Yes. No. N/A. N/A
are part of SLR be
used to borrow
from RBI?
Relationship with Same as Repo 25 basis points N/A Not linked to Repo. 25 basis points below
Repo higher than Repo Repo.
Provided under RBI No No Yes Yes Yes
Act, 1934
Limits N/A Up to 2% of NDTL Min: 5 Crores Min: 5 Crores Min: 1 crore
Max: No Limit Max: No Limit Max: No Limit
 Sources of Government’s borrowings
Borrowings from the Market Borrowings from the RBI
Long Term Borrowings Long Term Borrowings
Issuance of Dated G-Secs FRBM Act, 2003: RBI should not lend long term loans to
( Note: State Government issue State Development Loans) Government to finance its deficit under normal circumstances.

Types of Dated G-Secs: Special G-Secs such as Oil Bonds, Recap Bonds, Exceptional Circumstances: National Security, War, Collapse of
Sovereign Gold Bonds, UDAY Bonds (States) Agriculture, Structural reforms.

Short Term Borrowings (Only Central Government) Short Term borrowings (Both Centre and States)

Treasury Bills FRBM Act, 2003: RBI can lend loans to the Government for short
Maturity Period: T-91, T-182, T-364 term to address the temporary mismatches in cash balances.
Issued at discount and redeemed at face value.
Example: Face value of T-Bill may be Rs 100 but issued at Rs 95. Upon Ways and Means Advances
Maturity, investor gets Rs 100. What?: Loan facility of the RBI to the Centre and State to address
temporary mismatches in Cash Balances
Cash Management Bills Maturity: 90 Days
Maturity Period: Less than 91 days. Interest Rate: Repo Rate
Issued at discount and redeemed at face value. Limits:
Purpose: To Address temporary mismatches in Cash balances with • Centre: Decided mutually by the RBI and Central Government.
Government. • States: Limits are set based upon recommendations of Advisory
Committee

Centre: Normal WMAs and Overdraft

States: Special Drawing Facilities (SDFs), Normal WMAs and
Overdraft
 Prelims 2021 Prelims 2018
With reference to India, consider the following statements: Consider the following statements :
1. Retail investors through demat account can invest in 1. The Reserve Bank of India manages and services
Treasury Bills and Government of India Debt Bonds in Government of India Securities but not any State
primary market. Government Securities.
2. Treasury bills are issued by the Government of India
2. The Negotiated Dealing System-Order Matching is a
and there are no treasury bills issued by the State
government securities trading platform of the Reserve
Governments.
Bank of India.
3. Treasury bills offer are issued at a discount from the
3. The Central Depository Services Ltd. Is jointly promoted par value.
by the Reserve Bank of India and the Bombay Stock
Which of the statements given above is/ are correct?
Exchange.
(a) 1 and 2 only
Which of the statements given above is/are correct?
(b) 3 only
(a) 1 only (c) 2 and 3 only
(b) 1 and 2 (d) 1, 2 and 3

(c) 3 only
(d) 2 and 3
BANK RUN
 Criteria Private Banks Public Sector Banks
Regulated Banking Regulation Act, 1949 • Banking Regulation Act, 1949
under • Banking Company (Acquisition and Transfer of
undertakings) Act, 1970
• Banking Company (Acquisition and Transfer of
undertakings) Act, 1980
Regulated by RBI RBI
Government
Role of RBI • Issue Licenses Limited role of the RBI.
• Supersede Board of Directors
• Remove the Chairman
• Force the mergers of Private Banks
 Prelims 2022
Consider the following statements:
1. In India, credit rating agencies are regulated by Reserve Bank of India.
2. The rating agency popularly known as ICRA is a public limited company.
3. Brickwork Ratings is an Indian credit rating agency.

Which of the statements given above are correct?

(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
 Prelims 2012 Prelims 2019
The basic aim of Lead Bank Scheme is that The Service Area Approach was implemented under
(a) big banks should try to open offices in each district the purview of
(b) there should be stiff competition among the various (a) Integrated Rural Development Programme
nationalized banks (b) Lead Bank Scheme
(c) individual banks should adopt particular districts for (c) Mahatma Gandhi National Rural Employment
intensive development Guarantee Scheme
(d) all the banks should make intensive efforts to mobilize (d) National Skill Development Mission
deposits
 Subsidiaries of RBI
Deposit Insurance and Credit • Statutory body under the DICGC Act, 1961.
Guarantee Corporation (DICGC) • Authorized capital: 50 Crores
• Chaired by Dy. Governor, RBI.
Bharatiya Reserve Bank Note Registered as a Private Limited Company under the Companies Act 1956.
Mudran Private Limited Mandate: Printing of Currency Notes
(BRBNMPL)
Reserve Bank Information Take care of the IT requirements, including the cyber security needs of the Reserve Bank and its
Technology Private Limited regulated entities.
(ReBIT)
Indian Financial Technology and Indian Financial Network (INFINET): Communication backbone for the Indian Banking and Financial
Allied Services (IFTAS Sector.
Structured Financial Messaging System (SFMS): Messaging system facilitating RTGS, NEFT, Government
payments and receipts, etc.
Indian Banking Community Cloud (IBCC): Provides Core Banking Solution (CBS) and other software
applications such as SFMS, mobile banking, etc. as web service/s.
Global Interchange for Financial Transactions (GIFT): integrated payment and settlement system for
the Banks.
Reserve Bank Innovation Hub Managed by a Governing Council (GC) led by a Chairperson to be appointed by RBI.
(RBIH)
 Prelims Pointers on Deposit Insurance
Coverage of Banks Commercial banks, Regional rural banks, Local area banks (LABs), Payment Banks, Small
Finance Banks, and Cooperative banks.
Deposits Covered Savings, Fixed, Current and Recurring Deposits.
Deposits not Covered Deposits of Central/State Governments; Inter-Bank Deposits.
Premium Paid by the banks and hence the cost is not directly borne by the deposit holder.
Union Budget 2020-21 Increase in Deposit Insurance from Rs 1 Lakh to Rs 5 Lakhs
Timeline for payment: Earlier, Deposit Insurance was available upon liquidation,
reconstruction or merger of Bank. New Amendment enables the depositors to withdraw up to
Deposit Insurance and Rs 5 lakh within 90 days upon placing a Bank under moratorium.
Credit Guarantee
Corporation (Amendment) Premium paid by banks to the DICGC: The Act limits the rate of premium (per annum) for a
Bill 2021 bank at 0.15% of its total outstanding deposits. The act has now allowed the DICGC to
increase this maximum limit with the prior approval of RBI.

Repayment by the bank to the Corporation: Under the Act, once the DICGC makes payment to
the depositors, the insured bank becomes liable to repay the same amount to the
Corporation. The new amendment provides that the Corporation may provide for the time
limit for repayment by the Bank.
 Prelims 2022
In India, which one of the following compiles information on
industrial disputes, closures, retrenchments and lay-offs in factories
employing workers?
(a) Central Statistics Office
(b) Department for Promotion of Industry and Internal Trade
(c) Labour Bureau
(d) National Technical Manpower Information System
 Important Initiatives of RBI
Housing Price Index (HPI) Rationale: Measure changes in prices of Housing across 10 Cities. Base Year: 2010-11
Banking Services Price Index Measures changes in the prices charged by the Banks for their services. Base Year: 2011-12
(BSPI)
Report on Trend and Progress of Prepared in accordance with BR Act, 1949 to highlight the overall health of Banks
Banking
Report on Currency and Finance Theme based Reports published annually. 2021-21 Theme: Review of Monetary Policy Framework
Financial Stability Report Strength and Resilience of Financial sector in India
Monetary Policy Report Published under Section 45ZM of the Reserve Bank of India Act, 1934. Highlights the drivers of Inflation
Management of Foreign Highlights the Changes in the Forex Reserves
Exchange Reserves
RBI Consumer Confidence • Measure Consumer Confidence and expectations of Indian Economy on five economic variables -
Survey economic situation, employment, the price level, income and spending.
• Components: Current situation index and Future expectations index.
• A consumer confidence Index above 100 gives optimistic perception of the consumers while reading
below 100 denotes pessimistic perception.
Industrial Outlook Survey Measure assessment of the business climate by Indian manufacturing companies
Inflation Expectation Survey Survey on Inflation Expectations
Bank Lending Survey Assessment and expectations of major scheduled commercial banks (SCBs) on loan demand
Services and Infrastructure Assessment and expectations of Indian companies in the services and infrastructure sectors
Outlook Survey
 Chapter Wise Analysis: Monetary Policy
Name of the Chapter Monetary Policy
Relative Importance High
What to study? • Concepts related to Money: Fiduciary Money, Legal Tender, Measurement of Money supply,
Money Multiplier, Velocity of Money, Currency Deposit ratio, CBDC, Liquidity Trap etc.
• Monetary Policy Framework: MPC, MPFA, Inflation Targeting Framework in India etc.
• Monetary Policy Tools: Quantitative and Qualitative
• Types of Monetary Policies: Expansionary vs Contractionary; Accommodative Vs Neutral Vs
Calibrated Tightening etc.
• Unconventional Monetary Policies: ZIRP, NIRP, Helicopter Money
• Monetary Policy Transmission: Base Rate, MCLR, External Benchmarking of Loans
• Important developments: Standing Deposit Facility, Forex Swaps, TLTROs, Operation Twist, G-
SAP, Variable Reverse Repo Auctions etc.
Previous Year • Prelims 2022: Role of RBI in Controlling Inflation and Exchange rate fluctuations
Questions • Prelims 2021- Money Multiplier; Factors affecting Bond Yields; Creation of New Money- Most
Inflationary
• Prelims 2020- Aggregate Money Supply; Interest Coverage Ratio; Expansionary Monetary
Policy
• Prelims 2018- Legal Tender Money
 Prelims 2012 Prelims 2013
Which of the following measures would result in an increase An increase in the Bank Rate generally indicates that
in the money supply in the economy? (a) Market rate of interest is likely to fall.
1. Purchase of G-Sec from the public by the Central Bank. (b) Central Bank is no longer making loans to
2. Deposit of currency in commercial banks by the public. commercial banks.
3. Borrowing by the government from the Central Bank. (c) Central Bank is following an easy money policy.
4. Sale of government securities to the public by the Central (d) Central Bank is following a tight money policy.
Bank.

Select the correct answer using code given below: Prelims 2013
(a) 1 only 'Open Market Operations' refers to:
(b) 2 and 4 only (a) borrowing by banks from the RBI
(c) 1 and 3 only (b) lending by commercial banks to industry and
(d) 2, 3 and 4 only trade
(c)purchase and sale of government securities by the
RBI
(d) None of the above

Prelims 2015
When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points which of the
following is likely to happen?

(a) India's GDP growth rate increases drastically.

(b) Foreign Institutional Investors may bring more capital into our country.
(c) Scheduled Commercial Banks may cut their lending rates.
(d) It may drastically reduce the liquidity to the banking system.
 Prelims 2015 Prelims 2016
Which reference to inflation in India, which of the following What is/are the purpose/purposes of the `Marginal Cost of Funds
statements is correct? based Lending Rate (MCLR)’ announced by RBI?

(a) Controlling the inflation in India is the responsibility of 1. These guidelines help improve the transparency in the
the Government of India only methodology followed by banks for determining the interest rates
on advances.
(b) The Reserve Bank of India has no role in controlling the 2. These guidelines help ensure availability of bank credit at interest
inflation rates which are fair to the borrowers as well as the banks.

(c) Decreased money circulation helps in controlling the Select the correct answer using the code given below.
inflation (a) 1 only
(b) 2 only
(d) Increased money circulation helps in controlling the (c) Both 1 and 2
inflation (d) Neither 1 nor 2

Prelims 2017
Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC)?

1. It decides the RBI's benchmark interest rates.

2. It is a 12-member body including the Governor of RBI and is reconstituted every year.
3. It functions under the chairmanship of the Union Finance Minister.

Select the correct answer using the code given below :

(a) 1 only (b) 1 and 2 only (c) 3 only (d) 2 and 3 only
 Prelims 2020 Prelims 2021
If the RBI decides to adopt an expansionist monetary Indian Government Bond Yields are influenced by which of the
policy, which of the following would it not do? following?
1. Actions of the United States Federal Reserve
1. Cut and optimize the Statutory Liquidity Ratio 2. Actions of the Reserve Bank of India
3. Inflation and short-term interest rates
2. Increase the Marginal Standing Facility Rate
Select the correct answer using the code given below.
3. Cut the Bank Rate and Repo Rate (a) 1 and 2 only
(b) 2 only
Select the correct answer using the code given below: (c) 3 only
(a) 1 and 2 only (d) 1, 2 and 3
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3