NISM Certifications · NISM-Series-XV: Research Analyst · Economic Analysis
Other things remaining equal, which action by the RBI would most directly reduce liquidity in the banking system?
Reverse repo or variable rate reverse repo auctions reduce liquidity because banks park surplus funds with the RBI, withdrawing money from the system. Lowering CRR, buying government securities in open market operations, or cutting the repo rate all add liquidity or ease conditions.
- AReducing the Cash Reserve Ratio
- BConducting reverse repo or variable rate reverse repo auctions to absorb fundsCorrect
- CConducting open market purchases of government securities
- DReducing the repo rate
Explanation
Reverse repo operations absorb surplus funds from banks, reducing liquidity. A lower CRR and open market purchases inject liquidity. A lower repo rate cuts borrowing cost and is expansionary.
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