KNOWING THE GREAT MINDS - 4
THE MONETARY MONARCH - RBI 2
Monetary policy includes LAF, MSF, CRR and SLR. These tend to be the most important terms and tools used by the RBI to control money flow in the market. Liquidity Adjustment Facility includes 1) Bank rate 2) Repo rate 3) Reverse Repo rate. In layman’s terms, Bank rate is the rate of interest at which the RBI lends to banks. It is just like lending public with or without any security. For example, when banks are out of funds, and want to borrow from RBI, which is considered the lender of last resort, let us say an amount of RS 100 at the interest of 5%. This interest rate is called the bank rate. It is a long term borrowing option for the banks with a pre decided maturity date. It was the most often used platform by the banks but recently went under operation when its prominence was taken over by the Repo rate. Repo is the repurchase agreement. It means that banks place the government securities as collateral with the RBI and borrow money for a short period of time (seven d...
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