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    Question

    In case of surplus liquidity in the system, which of

    the following instrument can be used by RBI to manage such surplus liquidity? A.    Reverse repo auctions B.    Operations under the Market Stabilisation Scheme (MSS) using Treasury Bills and dated securities. C.   OMO (Open market operations) D.   Issuances of Cash Management Bills (CMBs)
    A A and C Correct Answer Incorrect Answer
    B B and D Correct Answer Incorrect Answer
    C A, B and C Correct Answer Incorrect Answer
    D B, C and D Correct Answer Incorrect Answer
    E All of the above Correct Answer Incorrect Answer

    Solution

    Reverse repo operation is when RBI borrows money from banks by lending securities. The interest rate paid by RBI in this case is called the reverse repo rate.   MSS securities are issued with the objective of providing the RBI with a stock of securities with which it can intervene in the market for managing liquidity.   Open market operations are conducted by the RBI by way of sale or purchase of government securities (g-secs) to adjust money supply conditions. The central bank sells g-secs to suck out liquidity from the system and buys back g-secs to infuse liquidity into the system. These operations are often conducted on a day-to-day basis in a manner that balances inflation while helping banks continue to lend. The RBI uses OMO along with other monetary policy tools such as repo rate, cash reserve ratio and statutory liquidity ratio to adjust the quantum and price of money in the system.   CMBs in India are non-standard, discounted instruments issued by government to meet temporary mismatches in the cash flow of the government. First set of CMBs were issued in May 2010. CMBs have the generic character of Treasury Bills but are issued for maturities less than 91 days. CMB is the most flexible instrument for a central bank because it can be issued when needed, allowing the central bank to have lower cash balances and issue fewer long-term notes.  

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