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Which of the following pairs is/are correctly matched?
Liquidity Adjustment Facility: Overnight cash at repo rate within the Statutory Liquidity Ratio limit.
Marginal Standing Facility: Facility outside the Statutory Liquidity Ratio limit.
Bank Rate: Marginal Standing Facility plus one.
Select the correct answer using the code given below:
- a)1 and 2 only
- b)2 and 3 only
- c)1 only
- d)1, 2 and 3
Correct answer is option 'A'. Can you explain this answer?
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Most Upvoted Answer
Which of the following pairs is/are correctly matched? Liquidity Ad...
- Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term repo auctions. Progressively, the Reserve Bank has increased the proportion of liquidity injected under fine-tuning variable rate repo auctions of range of tenors. The aim of term repo is to help develop the inter-bank term money market, which in turn can set market-based benchmarks for pricing of loans and deposits, and hence improve transmission of monetary policy. The Reserve Bank also conducts variable interest rate reverse repo auctions, as necessitated under the market conditions.
- Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks to the banking system.
- Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate. Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes. Hence, pair 3 is not correctly matched.
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Which of the following pairs is/are correctly matched? Liquidity Ad...
Correctly matched pairs related to monetary policy tools in India are as follows:
- Liquidity Adjustment Facility (LAF): It is a tool used by the Reserve Bank of India (RBI) to adjust the liquidity in the market through repo rate, reverse repo rate, and marginal standing facility. LAF aims to manage short-term liquidity in the market while maintaining the statutory liquidity ratio (SLR). Overnight cash at repo rate within the SLR limit is a part of LAF.
- Marginal Standing Facility (MSF): It is a facility provided by RBI to banks to borrow money overnight outside the SLR limit. Banks can borrow funds by pledging government securities with the RBI at a higher interest rate than the repo rate. MSF is a tool used by RBI to manage sudden liquidity shortages in the market.
- Bank Rate: It is the rate at which RBI lends money to commercial banks without any security. Bank rate is used by RBI to control credit growth in the economy. Marginal Standing Facility plus one is not a correct definition of the Bank Rate.
Hence, option A is the correct answer as it matches LAF to overnight cash at repo rate within SLR limit and MSF to facility outside the SLR limit.
- Liquidity Adjustment Facility (LAF): It is a tool used by the Reserve Bank of India (RBI) to adjust the liquidity in the market through repo rate, reverse repo rate, and marginal standing facility. LAF aims to manage short-term liquidity in the market while maintaining the statutory liquidity ratio (SLR). Overnight cash at repo rate within the SLR limit is a part of LAF.
- Marginal Standing Facility (MSF): It is a facility provided by RBI to banks to borrow money overnight outside the SLR limit. Banks can borrow funds by pledging government securities with the RBI at a higher interest rate than the repo rate. MSF is a tool used by RBI to manage sudden liquidity shortages in the market.
- Bank Rate: It is the rate at which RBI lends money to commercial banks without any security. Bank rate is used by RBI to control credit growth in the economy. Marginal Standing Facility plus one is not a correct definition of the Bank Rate.
Hence, option A is the correct answer as it matches LAF to overnight cash at repo rate within SLR limit and MSF to facility outside the SLR limit.
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Which of the following pairs is/are correctly matched? Liquidity Adjustment Facility: Overnight cash at repo rate within the Statutory Liquidity Ratio limit. Marginal Standing Facility: Facility outside the Statutory Liquidity Ratio limit. Bank Rate: Marginal Standing Facility plus one. Select the correct answer using the code given below:a)1 and 2 onlyb)2 and 3 onlyc)1 onlyd)1, 2 and 3Correct answer is option 'A'. Can you explain this answer?
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