Question

RBI allows banks to borrow money through repo agreement during --- and allows investment to RBI through reverse repo agreement, during ---.

• A. inflation, deflation
• B. deflation, inflation
• C. recession, boom
• D. growth period, stabilization period

Answer 1

Answer:

B. deflation, inflation

INDIRECT METHODS OF MONETARY POLICY:

1. Repo Rate:

• It is a short-term interest rate which RBI charges on commercial banks on loans given by RBI
• Repo rate is also known as Repurchase Agreement or Repurchasing Option.
• At the time of inflation, RBI increases repo rate.
• At the time of deflation, RBI reduces repo rate.

2. Reverse Repo:

• When commercial banks deposit their surplus funds with RBI, commercial banks get interest from RBI.
• At the time of inflation, RBI increase reverse repo rate.
• At the time of deflation, RBI decreases reverse repo rate.

3. LAF (Liquidity Adjustment Facility):

• It is the liquidity injection and liquidity absorption facility introduced in 1998 as a result of the Narasimham Committee's recommendation.
• Here RBI allows banks to borrow money through repo agreement (during deflation) and allows investment to RBI through reverse repo agreement (during inflation).

4. Open Market Operations:

1. It is the process of selling and repurchasing government securities by RBI through commercial banks.
2. At the time of inflation, RBI sells the securities.
3. At the time of deflation, RBI buys the securities from banks

5. MSS (Market Stabilization Scheme)

It aims to withdraw or stabilize excess money supply created out of the foreign exchange market intervention.

6. Marginal Standing Facility (MSF):

1. It is an emergency liquidity facility wherein, RBI permits banks to borrow fund without sufficient level of eligible securities for a loan.
2. RBI lends funds in overnight to scheduled banks through this system between 3:30 PM to 4:30 PM with a minimum amount of One crore.

7. SDF (Standing Deposit Facility):

RBI introduced SDF as an additional tool for absorbing liquidity without proper securities (govt security) in return.