CA Foundation · Business Economics · Money Market
The Reserve Bank wants to absorb excess liquidity from the banking system through its daily operations. Which action is consistent with this aim?
Conducting reverse repo auctions absorbs excess liquidity, because the RBI borrows money from banks against government securities, withdrawing funds from the system. Repo operations, lower CRR or SLR and outright purchases of securities all add liquidity instead.
- ALowering the CRR and buying securities outright
- BConducting reverse repo auctionsCorrect
- CConducting repo auctions
- DReducing the reverse repo rate to zero and cutting SLR
Explanation
In a reverse repo the RBI sells securities temporarily and takes funds from banks, so liquidity is absorbed. A repo injects funds. Lowering CRR or SLR and buying securities all release money into the system, so they are expansionary.
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