Tells about-Liquiditu Adjustment Facility Repo Rate, Reverse Repo Rate, Open Market Solution, Marginal Standing Facility, Bank Rate

1. Chapter 04-RBI
MONETARY TOOLS-INDIRECT TOOLS

2. INDIRECT TOOLS
 The reserve bank’s Monetary Policy Department (MPD)
formulates Monetary Policy.
 There are several direct instruments(tools) used in the
formulation and implementation of Monetary Policy are-
1. Liquidity Adjustment Facility
2. Repo Rate
3. Inverse Repo Rate
4. Open Market Operation
5. Marginal Standing Facility
6. Bank Rate

3. 1.Liquidity Adjustment Facility
 LAF is a monetary tool which allows banks
through repurchase agreements.
 LAF consists of Repo and Reverse Repo.
 This arrangement allows bank to respond
to liquidity pressures and is used by
governments to assure basic stability in
the financial market.
 So LAF is a tool used by RBI to Control
short term liquidity money supply in
market.

4. 2.Repo Rate
 Repo Rate is the rate at which the central
bank of a country lends money to
commercial bank in the event of shortfall
of funds.
 Repo rate is used by Monetary Policy to
control Inflation.

5. 3.Inverse Repo Rate
 Reverse Repo Rate Is the Rate which the
central bank of a country borrows money
from commercial bank within the country.
 It is a monetary instruments which can be
used to control the money supply in the
country.

6. 4. Open Market operations (OMO)
 The buying and selling of government
securities in open market in order to
expand or contract the amount of money
in the banking system.
 Purchases inject money into the banking
system and simulate growth while sales of
securities do the opposite.

7. 5. Marginal Standing Facility(MSF)
 MSF rate refers to the rate at which the
scheduled banks can borrow fund
overnight from RBI against government
securities
 For this facility all scheduled commercial
bank must have current account and SGL
Account.

8. 6. Bank Rate
 The interest Rate at which a nation’s
central bank lends money to domestic
banks.
 Managing the bank rate is a preferred
method by which central bank regulate
the level of economic activity