TOOLS FOR MANAGING LIQUIDITY IN THE

MONEY MARKET
AND MONEY MARKET IN INDIA

By Sagar M V
Sreeja Sekhar
There Are Five Main Tools For Managing Liquidity In The Money
Market And They Are:

(A) RESERVE REQUIREMENTS

(B) INTEREST RATES
Prime lending rate
Bank rate
(C) REFINANCE FROM THE RESERVE BANK
(D) LIQUIDITY ADJUSTMENT FACILITY
(E) REPOS
 Reserve Requirements
The Reserve Requirements are of two Types
Cash Reserve Ratio
Statutory Liquid Ratio

Cash reserve Ratio (CRR) is the amount of funds that the banks
have to keep with the RBI. If the central bank decides to increase
the CRR, the available amount with the banks comes down. The
RBI uses the CRR to drain out excessive money from the system.
Commercial banks are required to maintain with the RBI an
average cash balance.
Current CRR : 4 %

Apart from Cash Reserve Ratio (CRR), banks have to maintain a

stipulated proportion of their net demand and time liabilities in
the form of liquid assets like cash, gold and unencumbered
securities. Treasury bills, dated securities issued under market
borrowing programme and market stabilisation schemes (MSS),
etc also form part of the SLR.

Current SLR : 20.50%

 Interest Rate
A prime rate or prime lending rate is an interest rate used by
banks, usually the interest rate at which banks lend to favoured
customers
Bank rate is the rate of interest which a central bank charges
on the loans and advances to a commercial bank.
REFINANCE FROM THE RESERVE BANK

Refinance is the method to replace or adjust the terms of existing

debt obligation like loan, mortgage or credit note. While taking a
credit, you take the loan or mortgage at a certain rate of interest.
Through refinance, you can renegotiate the terms of your debt
obligations like interest rates of your borrowed amount, length of
agreement, amount of loan etc.
There are various types of refinance offered by RBI.
1. Export Credit Refinance Facility
2. Special Refinance Facility (SRF)
 Export Credit Refinance Facility
RBI offers export credit refinance facility to the
scheduled banks under Section 17(3A) of RBI Act 1934.
Presently, credit refinance is offered up to 15% of the outstanding
export credit. The monthly payable interest is calculated on daily
balances and maximum duration for repayment is 180 days.

Special Refinance Facility (SRF)

Special refinance facility was introduced under Section
17(3B) of RBI Act, 1934. It allows scheduled commercial banks
(except Regional Rural Banks) to refinance up to 1% of Net
Demand and Time Liabilities (NDTL) of each bank.
 LIQUIDITY ADJUSTMENT FACILITY

LAF is used to aid banks in adjusting the day to day mismatches

in liquidity. LAF helps banks to quickly borrow money in case of
any emergency or for adjusting in their SLR/CRR requirements.
LAF consists of repo and reverse repo operations

Repo or repurchase option is a collaterised lending i.e. banks

borrow money from Reserve bank of India to meet short term
needs by selling securities to RBI with an agreement to
repurchase the same at predetermined rate and date
 Reverse repo operation is when RBI borrows money from
banks by lending securities. The interest rate paid by RBI in
this case is called the reverse repo rate.

* Repo operations inject liquidity into the system and Reverse

repo operation therefore absorbs the liquidity in the system
 Repo

Repo Rate
Repo rate is the rate at which RBI lends to its clients generally
against government securities.
Reduction in Repo rate helps the commercial banks to get money
at a cheaper rate and increase in Repo rate discourages the
commercial banks to get money as the rate increases and
becomes expensive.
 Reverse Repo Rate
Reverse Repo rate is the rate at which RBI borrows
money from the commercial banks. The increase in the Repo rate
will increase the cost of borrowing and lending of the banks
which will discourage the public to borrow money and will
encourage them to deposit.

Repo Rate and Reverse Repo Rate, As of 19 May 2017

Repo rate 6.25%

Reverse repo rate 6.00%
 MONEY MARKET IN INDIA

Gottery Crowther defines money market as the Collective name

given to the varous firms and institutions that deal in the various
grades of near money
 The organised sector of the money market consists of the
Reserve Bank of India, commercial banks, companies lending
money, financial intermediaries such as the Life Insurance,
Credit and Investments Corporation of India, Unit Trust of
India, Land Mortgage Banks, Cooperative Banks, Insurance
Companies etc. and call loan brokers, and stock brokers.

The unorganised sector of the money market is largely made

up of indigenous bankers, money lenders, traders, commission
agents etc., some of whom combine money lending with trade
and other activities.
Generally speaking, these two sectors of the Indian
money market those institutions which come directly
or indirectly under the broad regulations of the Reserve
Bank constitute the organised sector, while the others
which fall completely outside the purview of the central
banking regulations, make up the unorganised sector.
 Scheduled Banks are those Banks which are included in the 2nd
Schedule of the Reserve Bank of India. The Scheduled status is
given RBI when the Bank satisfies the criteria laid down by the RBI.

Public Sector Banks:

Public sector bank is a bank in which the government holds a
major portion of the shares.
Example : SBI, PNB, BOB,Allahabad Bank etc.

Private Sector Banks:

In these banks, most of the equity is owned by private
bodies, corporations, institutions or individuals rather
than government. These banks are managed and
controlled by private promoters.
Example:Yes Bank, IndusInd Bank , ICICI Bank
 Co-operative banks are government supported financial
agency in India , which are organized and managed with the
aim of co-operation , self help and mutual help . It functions
with the no profit and no loss model . They perform basic
banking functions like borrowing and lending of credits