The interest rate at which the Reserve Bank absorbs liquidity from banks under the Liquidity Adjustment Facility (LAF), on an overnight basis, against the collateral of eligible government securities, is called _____.
Reverse Repo Rate
Understanding RBI's Reverse Repo Rate under LAF
The Reserve Bank of India (RBI) employs various instruments to manage the supply of money or liquidity in the banking system. One such important tool is the Liquidity Adjustment Facility (LAF).
The LAF is primarily used for managing short-term liquidity. It involves daily auctions of repurchase agreements (repos) and reverse repurchase agreements (reverse repos).
What is the Reverse Repo Rate?
The question describes a scenario where the Reserve Bank absorbs liquidity from banks. This happens when banks lend money to the RBI. The rate at which the RBI borrows money from commercial banks is called the Reverse Repo Rate.
Key characteristics mentioned in the question that align with the Reverse Repo Rate are:
- RBI absorbs liquidity from banks.
- It is done under the Liquidity Adjustment Facility (LAF).
- It is typically on an overnight basis.
- Eligible government securities are used as collateral.
Comparing Options
Let's differentiate the Reverse Repo Rate from the other options provided:
| Term | Description |
|---|---|
| Reverse Repo Rate | The rate at which the RBI borrows funds from banks (absorbs liquidity) against the collateral of government securities. |
| Repo Rate | The rate at which banks borrow funds from the RBI (RBI injects liquidity) against the collateral of government securities. |
| Bank Rate | The rate at which the RBI lends money to commercial banks without any security or collateral. It is typically for longer durations and is also the penal rate charged by RBI for shortfalls in reserve requirements. |
| Marginal Standing Facility (MSF) (Likely implied by "Marginal Permanent Facility") | A window for banks to borrow from the RBI in emergency situations when inter-bank liquidity dries up. Banks can borrow overnight at a penal rate against eligible securities. This is banks borrowing from RBI, not the other way around. |
The question specifically asks about the rate at which the RBI absorbs liquidity from banks using government securities under LAF, which matches the definition of the Reverse Repo Rate.
Conclusion: The Reverse Repo Rate
Therefore, the interest rate at which the Reserve Bank absorbs liquidity from banks under the Liquidity Adjustment Facility (LAF), on an overnight basis, against the collateral of eligible government securities, is called the Reverse Repo Rate.
Important Questions from Money Market
What is ‘Issue Price’?
_________ is a situation in the bonds market when the rate of interest falls to its lowest level and the speculative demand for money becomes perfectly elastic.
________ is the money which is accepted as a medium of exchange because of the trust between the payer and the payee.
When the general interest rate reaches a very low level, which of the following statements will be correct?
Choose incorrect statement from the following:
1. 28 Days T - bills were introduced in 1998
2. 364 Days T - bills were introduced in 1992
3. 182 Days T - bills were introduced in 1986
4. 273 Days T - bills were introduced in 2006
