NISM Certifications · NISM-Series-XV: Research Analyst · Economic Analysis
If the RBI wants to absorb excess liquidity from the banking system through its liquidity adjustment facility, which action is it most likely to take?
The RBI would conduct reverse repo operations. In a reverse repo it borrows funds from banks against government securities, thereby absorbing surplus liquidity. Repo operations, CRR cuts and open market purchases of securities all add liquidity to the banking system instead.
- AConduct reverse repo operationsCorrect
- BConduct repo operations
- CCut the cash reserve ratio
- DBuy government securities through open market operations
Explanation
In a reverse repo, the RBI borrows money from banks against securities, absorbing liquidity. A repo injects liquidity, a CRR cut releases funds, and OMO purchases of securities add money to the system.
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