Question

RBI buys foreign currency and releases equivalent amount in Indian Rupee in Indian market in ----.

• A. Open market operations
• B. RBI currency swap
• C. Quantitative easing
• D. Monetary policy tightening

Answer 1

Answer:

B. RBI currency swap

DIRECT INSTRUMENTS OF MONETARY POLICY OF RBI:

1. CRR (Cash Reserve Ratio)

•  It is the certain percentage of net demand and time liability (NDTL) of banks that must be maintained with RBI.
• The refinance fund from NABARD, SIDBI, RBI are exempted from CRR provision.
• There is a penal charge for not maintaining CRR at the rate of 3%.

2. SLR (Statutory Liquidity Ratio):

• It is a requirement that, commercial banks have to keep a specified portion of their NDTL (Net Demand & Time Liability) in liquid assets.
• SLR is maintained in the form of cash, gold or bond (govt. security).
• Penal charge for not maintaining CRR, SLR is 3%.

3. Refinance Facility:

• RBI provides refinance facility which includes foreign exchange and currency swap facility.
• Swap is a derivative contract for exchange of one instrument for another.
• In RBI currency swap, RBI buys foreign currency and release equivalent amount in Indian Rupee in Indian market.