Liquidity Management during Covid-19: Initiatives undertaken by Reserve Bank of India

Here are the liquidity management initiatives undertaken by the Reserve Bank of India (RBI) during the COVID-19 pandemic:

  • Reduction in the repo rate and reverse repo rate. The repo rate is the rate at which the RBI lends money to banks, and the reverse repo rate is the rate at which banks lend money to the RBI. By reducing these rates, the RBI made it cheaper for banks to borrow and lend money, which helped to inject liquidity into the system.
  • Increase in the cash reserve ratio (CRR). The CRR is the amount of money that banks have to keep with the RBI as reserves. By increasing the CRR, the RBI reduced the amount of money that banks had available to lend, which helped to absorb liquidity from the system.
  • Introduction of the Standing Deposit Facility (SDF). The SDF is a facility through which banks can park their excess liquidity with the RBI at a pre-determined rate of interest. This helped to absorb excess liquidity from the system and prevent it from causing inflation.
  • Conduct of variable rate reverse repo (VRRR) auctions. The VRRR is an auction through which the RBI absorbs surplus liquidity from the system. The RBI sets a rate at which it is willing to absorb liquidity, and banks can bid for the amount of liquidity they need. This helped to absorb excess liquidity from the system in a more targeted manner.
  • Launch of the Targeted Long-Term Repo Operations (TLTROs). The TLTROs are a special type of repo operation that is targeted at specific sectors of the economy. The RBI provides long-term loans to banks at a concessional rate of interest, which helps to boost credit flow to these sectors.
  • Introduction of the Marginal Standing Facility (MSF). The MSF is an emergency window through which banks can borrow money from the RBI at a pre-determined rate of interest. This provides banks with a last resort option to meet their liquidity needs in case of a sudden shortage.

Here are some MCQs on liquidity management during COVID-19:

  1. Which of the following is not a liquidity management tool used by the RBI during COVID-19?
    • Reduction in the repo rate
    • Increase in the CRR
    • Introduction of the SDF
    • Conduct of VRRR auctions
    • Launch of the TLTROs
    • The correct answer is (b). The RBI did not increase the CRR during COVID-19. Instead, it reduced the CRR to inject liquidity into the system.
  2. What is the purpose of the SDF?
    • To inject liquidity into the system
    • To absorb liquidity from the system
    • To provide banks with a last resort option to meet their liquidity needs
    • All of the above
    • The correct answer is (b). The SDF is a facility through which banks can park their excess liquidity with the RBI. This helps to absorb excess liquidity from the system and prevent it from causing inflation.
  3. How often are VRRR auctions conducted?
    • Monthly
    • Weekly
    • Biweekly
    • Daily
    • The correct answer is (b). VRRR auctions are conducted on a weekly basis.
  4. What is the pre-determined rate of interest at which banks can borrow money from the RBI under the MSF?
    • Repo rate
    • Reverse repo rate
    • MSF rate
    • None of the above
    • The correct answer is (c). The pre-determined rate of interest at which banks can borrow money from the RBI under the MSF is the MSF rate.