RBI LIQUIDITY MANAGEMENT
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 www.rbi.org.in or
also at our website www.allbankingsolutions.com
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,
insolvent.
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.
Banking
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.
Basel-I
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.
Basel-II
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
(MD).
Basel-III
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
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 www.rbi.org.in or
also at our website www.allbankingsolutions.com
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,
insolvent.
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.
Banking
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.
Basel-I
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.
Basel-II
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
(MD).
Basel-III
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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