INSTRUMENTS OF MONETARY POLICY
● The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of
government & other approved securities under the liquidity adjustment facility (LAF).
Reverse Repo Rate
The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the
collateral of eligible government securities under the LAF.
Liquidity Adjustment Facility (LAF):
● RBI’s liquidity adjustment facility/LAF helps banks to adjust their daily liquidity mismatches.
● It has two components which are repo (repurchase agreement) and reverse repo.
● When banks need liquidity to meet its daily requirement, they borrow from RBI through repo. The rate at which they
borrow fund is called the repo rate. When banks are flush with fund, they park with RBI through the reverse repo
mechanism at reverse repo rate.
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.
● The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money
● It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers for
long terms. 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.
Cash Reserve Ratio (CRR)
● The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its
Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India.
Statutory Liquidity Ratio (SLR)
● The share of NDTL that a bank is required to maintain in safe and liquid assets, such as, unencumbered government
securities, cash and gold.
● Changes in SLR often influence the availability of resources in the banking system for lending to the private sector.
Open Market Operations (OMOs)
● These include both, outright purchase and sale of government securities, for injection and absorption of durable
Market Stabilisation Scheme (MSS)
● This instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature
arising from large capital inflows is absorbed through sale of short-dated government securities and treasury bills.
● The cash so mobilised is held in a separate government account with the Reserve Bank.