Scribd
Upload
28 views1 page

Chapter 4. Market Operations

RBI

Uploaded by

Prajyot
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
28 views1 page

Chapter 4. Market Operations

RBI

Uploaded by

Prajyot
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 1

Chapter 4.

Market Operations
Wednesday, 18 December 2024 5:16 PM

Objective and Framework of Market Operations


• The primary objective of the RBI’s market operations is to enable
the transmission of monetary policy to the financial system.
• Market Operations Framework:
• Divided into:
1. Monetary Policy Operations: Managing liquidity and ensuring the
operating target (Weighted Average Call Rate - WACR) is aligned with the policy
repo rate.
2. Foreign Exchange Operations: Managing the currency market and
stabilizing exchange rates when required.

I. Monetary Policy Operations


1. Operating Target:
• The Weighted Average Call Rate (WACR) is the RBI’s operating
target.
• It reflects the cost of overnight funds in the interbank market.
2. Liquidity Management Framework:
• RBI uses Liquidity Adjustment Facility (LAF) and Marginal
Standing Facility (MSF) to address short-term or transient liquidity needs.
• For enduring liquidity issues, tools include:
• Long-Term Repo Operations (LTROs).
• Open Market Operations (OMO).
• Market Stabilization Scheme (MSS).
• Cash Reserve Ratio (CRR) adjustments.
• Forex Swaps (USD/INR swaps).

Key Instruments of Monetary Policy Operations


1. Liquidity Adjustment Facility (LAF):
• Introduced in 2000 as the primary tool for day-to-day liquidity
management.
• Includes:
• Repo: RBI lends to banks at the policy repo rate.
• Reverse Repo: RBI absorbs excess liquidity from banks.
2. Marginal Standing Facility (MSF):
• Allows banks to borrow overnight funds beyond their LAF limits.
• Provides a safety valve for unanticipated liquidity needs, but at a
penal rate (above the repo rate).
3. Open Market Operations (OMO):
• RBI buys or sells government securities outright to manage
liquidity.
• Purchase of securities injects liquidity, while sales absorb
liquidity.
4. Market Stabilization Scheme (MSS):
• Introduced in 2004 to manage excess liquidity from large capital
inflows.
• Uses government securities issued explicitly for sterilization
purposes.
• Proceeds are maintained in a separate account with the RBI.
5. Long-Term Repo Operations (LTRO):
• Introduced in 2020 to provide long-term liquidity to banks (1-3
years) at the repo rate.
• Helps in stabilizing credit markets during economic slowdowns.
6. Cash Reserve Ratio (CRR):
• A portion of banks’ NDTL that must be kept with the RBI.
• Increasing CRR absorbs liquidity; decreasing CRR injects liquidity.
7. Forex Swap Auctions:
• RBI conducts USD/INR swaps to inject or absorb rupee liquidity.
• For example, selling USD injects rupee liquidity into the system.

Revised Liquidity Management Framework (2020)


• Based on recommendations of an Internal Working Group (2019).
• Key updates include:
• Conducting 14-day Variable Rate Repo/Reverse Repo Auctions as
the main liquidity tool.
• Flexibility to conduct fine-tuning operations for overnight or
longer tenors.
• Streamlining the number of instruments for efficient liquidity
management.

II. Foreign Exchange Operations


1. RBI’s Role in the Foreign Exchange Market:
• Intervenes in the forex market to manage volatility in the Indian
rupee (INR).
• Objectives:
• Ensure orderly market conditions.
• Manage excess volatility.
• Maintain adequate foreign exchange reserves.
2. Key Foreign Exchange Instruments:
• Spot Market Interventions: Buying or selling foreign currency
directly in the spot market.
• Forward Market Operations: Engaging in contracts for future
delivery of foreign currency.
• Forex Swaps: Used to manage liquidity and stabilize the currency
market.
3. Management of Forex Reserves:
• RBI maintains reserves to support exchange rate stability and
provide a buffer against external shocks.
• Reserves are invested in safe and liquid instruments, such as US
Treasury bonds.

Special Liquidity Measures During Crises


1. Global Financial Crisis (2008):
• RBI implemented OMO purchases and CRR reductions to inject
liquidity.
• Introduced special refinance facilities for financial institutions.
2. COVID-19 Pandemic (2020):
• Launched targeted LTROs (TLTROs) to direct liquidity to stressed
sectors.
• Conducted Operation Twist: Simultaneous purchase of long-term
and sale of short-term government securities to manage yields.

Conclusion

The RBI’s market operations focus on liquidity management and foreign


exchange stability to ensure effective monetary policy transmission. By using
diverse instruments, including LAF, OMO, and forex swaps, the RBI maintains
the WACR close to the policy repo rate and ensures orderly financial market
conditions. During crises, the RBI introduces innovative measures like TLTROs
and Operation Twist to address economic disruptions effectively.

You might also like