Saturday, 31 December 2016



There has been a lot of confusion among bankers as well as students about various concepts used by

RBI in liquidity management. Therefore, I thought of writing about these in simple language. I

hope this will be of great use to young bankers as well as students.

What are the Open Market Operations (OMOs)?

An open market operation (popularly also known as OMO) is an activity by a central bank to buy or sell

government securities on the open market. Central banks use these operations as the primary

means of implementing monetary policy.

Thus we can say that in India OMOs are the market operations conducted by the Reserve Bank of India

(it is central bank of India) by way of sale/ purchase of Government securities to/ from the market with

an objective to adjust the rupee liquidity conditions in the market on a durable basis.

Sale of Government Securities

When the RBI feels there is excess liquidity in the market, it resorts to sale of securities thereby sucking

out the rupee liquidity. It is simple operation, wherein RBI sells the government securities to banks, who

pay for these investments. Thus excess liquidity goes to RBI.

Purchase or Buy Back of Government Securities

When RBI feels that the liquidity conditions are tight, it will purchase / buy back securities from the

market, thereby releasing liquidity into the market. Under this operation, RBI purchases government

securities from banks and thus pays the bank equivalent amount to banks. Thus, liquidity is injected

into the system.

What is buyback of Government securities and What Are its Results ?

Buyback of Government securities is a process whereby the Government of India and State

Governments buy back their existing securities from the holders. The buy back of securities by RBI is

done to achieve any one or all results:-

(i) The objectives of buyback can be reduction of cost (by buying back high coupon securities),

(ii) reduction in the number of outstanding securities; and

(iii) improving liquidity in the Government securities market (by buying back illiquid securities) and

infusion of liquidity in the system.

Governments make provisions in their budget for buying back of existing securities. Buyback can be

done through an auction process or through the secondary market route, i.e., NDS/NDS-OM.

What is Liquidity Adjustment Facility (LAF)?

LAF is a facility extended by RBI to scheduled commercial banks (excluding RRBs) and primary dealers to

avail of liquidity in case of requirement or park excess funds with the RBI in case of excess liquidity on an

overnight basis against the collateral of Government securities including State Government securities.

As we have seen above OMO is also a liquidity management tool in the hands of RBI, but that is a tool

used to adjust long term liquidity in the banking system. However, LAF enables liquidity

management on a day to day basis.

The operations of LAF are conducted by way of repurchase agreements (repos and reverse repos with

RBI being the counter-party to all the transactions. The latest rates can be viewed at or

also at our website

Banking Ombudsman Scheme: The Banking Ombudsman Scheme enables an expeditious and inexpensive forum to bank

customers for resolution of complaints relating to certain services rendered by banks. The Banking Ombudsman Scheme

introduced by RBI in 1995. There after many norms were issued by RBI and the important one was issued in 2006.

Banking Ombudsman is a quasi-judicial authority (the Banking Ombudsman- is a senior officials appointed by the Reserve Bank

of India) to redress customer complaints against deficiency in certain banking services. The Banking Ombudsman Scheme

functioning under India’s Banking Ombudsman Scheme 2006, and the authority was created pursuant to the decision by the

Government of India to enable resolution of complaints of customers of banks relating to certain services rendered by the banks.

The Banking Ombudsman provides speedy solutions to the grievances faced by the customers from various banks. It addresses

grievances by way of its legal framework and redressal is done accordingly. It is set up specifically for handling grievances

related to banking services and related matters under its purview. As on date, fifteen Banking Ombudsmen have been appointed

with their offices located mostly in state capitals. All Scheduled Commercial Banks, Regional Rural Banks and Scheduled

Primary Co-operative Banks are covered under the Scheme.

Bank Rate: It is the rate at which the RBI discounts bill of exchange or other commercial papers. Simply put, bank rate is the rate

at which the RBI extends credit to the commercial bank. Bank rate is also called discount rate.

Cash Reserve Ratio (CRR):

The RBI Act, 1934 stipulates that a commercial bank is required to keep in cash a portion of its deposits with the RBI. This is

known as Cash Reserve Ratio. The RBI can vary this ratio between 3 and 15 per cent.

Statutory Liquidity Ratio (SLR):

The SLR specifies that a commercial bank invests a designated minimum proportion of its total assets in liquid assets, such as

cash, gold and unecumbered approved securities (not government securities but having the status of the same). This is in

addition to the Cash Reserve Ratio. The SLR cannot be raised beyond 40%.

In other words, SLR refers to that protion of total deposits of a commercial bank which RBI has to keep with itself in the form of

cash resevers. SLR is an effective instrument of credit control with RBI. By varying the SLR, the RBI controls the expansion and

contraction of credit. If SLR is reduced, the lendable resources with the scheduled commercial banks gets correspondingly

increased and vice versa

Repo market

Repo : We have seen above LAF and now that it is conducted through Repos and Reverse Repos. The

Repo is also known as ready forward contact, and is an instrument for borrowing funds by selling

securities with an agreement to repurchase the said securities on a mutually agreed future date at an

agreed price which includes interest for the funds borrowed. Thus under Repo, banks borrow from RBI

and thus liquidity comes to banking system.

Reverse Repo : The reverse of the repo transaction is called ‘reverse repo’ which is lending of funds

against buying of securities with an agreement to resell the said securities on a mutually agreed future

date at an agreed price which includes interest for the funds lent. Thus, under Revere Repo banks

lend money to RBI and thus liquidity reduces in the banking system.

Thus, we can conclude that there are two legs to the same transaction in a repo/ reverse repo. The

duration between the two legs is called the ‘repo period’. Predominantly, repos are undertaken on

overnight basis, i.e., for one day period. Settlement of repo transactions happens along with the outright

trades in government securities.

Now from June 2014, RBI has also started conducting Term Reverse Repo too, under which the Reverse

Repo is done for periods longer than overnight. On 2nd June 2014 it conducted 4 day Term Reverse

Repo. Now onwards RBI will conduct these even for longer periods.

Collateralised Borrowing and Lending Obligation (CBLO)

This is another money market instrument used in India. This is operated by the Clearing Corporation

of India Ltd. (CCIL), for the benefit of the entities who have either no access to the inter bank call money

market or have restricted access in terms of ceiling on call borrowing and lending transactions.

CBLO is a discounted instrument available in electronic book entry form for the maturity period ranging

from one day to ninety days (up to one year as per RBI guidelines). In order to enable the market

participants to borrow and lend funds, CCIL provides the Dealing System through Indian Financial

Network (INFINET), a closed user group to the Members of the Negotiated Dealing System (NDS) who

maintain Current account with RBI and through Internet for other entities who do not maintain Current

account with RB

Balloon Payment

A large, lump-sum payment scheduled at the end of a series of considerably smaller periodic payments. A balloon payment may

be included in the payment schedule for a loan, lease or other stream of payments.

Bank assurance

Selling of insurance through the vast network of banks. It is part of what is today called as relationship banking.

Bank Credit

The borrowing capacity provided to an individual by the banking system in the form of credit or a loan. The total bank credit the

individual has is the sum of the borrowing capacity each lender bank provides to the individual.

Bank Discount

The bank charge made for payment of a note prior to maturity, expressed as a percentage of the note’s face value. In short,

front-end interest discounted on an instrument or the amount paid to the holder/bearer of the instrument (borrower) after interest

is deducted. The full amount expressed in the instrument is collected as repayment.

Bank Draft

A cheque drawn by one bank against funds deposited into its account at another bank, authorising the second bank to make

payment to the individual named in the draft.

Bank Guarantee

A guarantee from a bank ensuring that the liability of a debtor will be met. It is used in trade finance. Unlike a line of credit, the

sum is only paid if the counterparty does not fulfill the stipulated obligations under the contract.

Bank Rate

The rate at which RBI lends long term loans to scheduled commercial banks.

Bank Run

It occurs when a large number of customers withdraw their deposits because they believe the bank is, or might become,


Bank Reconciliation

The process of adjusting balance in an account reported by a bank to reflect transactions that have occurred since the reporting

date. For instance, cheque issued by account holder may not yet reflect in the bank’s books but accounted for by the issuer.

Hence, the need to know the likely balance.

Banker’s Acceptance

A written demand accepted by a bank to pay a specified amount at a future date.


In general terms, the business activity of accepting and safeguarding money owned by other individuals and entities and then

lending out this money in order to earn a profit.

Banking Code and Standards Board of India (BCSBI)

It was set up in 2005 by the RBI as an independent and autonomous watch dog to monitor and ensure that the Banking Codes

and Standards adopted by the banks are adhered to in true spirit.

Banking Ombudsman

The Banking Ombudsman is a senior official appointed by the RBI to redress customer complaints against deficiency in certain

banking services.

Banking Ombudsman Scheme

It enables an expeditious and inexpensive forum to bank customers for resolution of complaints relating to certain services

rendered by banks. Introduced in 1995 and revised in 2002 and 2006.

Barter System

It refers to a primitive exchange system where there is an exchange of goods or services without involving money.

Base Currency

The first currency quoted in a currency pair on foreign exchange. It is also typically considered the domestic currency or

accounting currency.

Base Effect

The base effect refers to the impact of the rise in price level (ie last year’s inflation) in the previous year over the corresponding

rise in price levels in the current year (ie current inflation). For example, if the price index had risen at a high rate in the

corresponding period of the previous year, then a similar absolute increase in the Price index in current year will be relatively

lower and vice-versa.

Base Rate

It is the minimum rate of interest that a bank is allowed to charge from its customers. It was recommended by Deepak Mohanty

Committee in 2009-10 and has replaced Benchmark Prime Lending Rate (BPLR) since July 2010.

Base Year

In the construction of an index, the year from which the weights assigned to the different components of the index, is drawn is

called Base Year. It is conventional to set the value of an index in its base year equal to 100.

Basel Accords

It refer to the banking supervision Accords prescribed by Basel Committee on Banking Supervision (BCBS). By far, BCBS has

issued three accords known as Basel I, Basel II and Basel III.

Basel Committee on Banking Supervision (BCBS)

Under Bank for International Settlement, the BCBS provides a forum for regular cooperation on banking supervisory matters. Its

objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide.


It is the first international accord to develop standardised risk-based capital requirements for banks across countries. It became

operational in 1988 and was replaced with a Basel-II in June 2004.


It is based on three mutually reinforcing pillars that allow banks and supervisors to evaluate various risks that banks face. These

are: Piller-I Minimum Capital Requirements (MCR); Pillar-II Supervisory Review Process (SRP); and Pillar-III Market Discipline



It is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk agreed upon by the members

of the Basel Committee on Banking Supervision in 2010-11. It was developed in a response to the deficiencies in financial

regulation revealed by the late-2000s financial crisis. It, therefore, attempts to reduce risk in banking by increasing quality and

quantity of capital

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