NISM Certifications · NISM-Series-XV: Research Analyst · Economic Analysis
When the RBI conducts a reverse repo operation under its liquidity adjustment facility, what is the effect on system liquidity?
A reverse repo absorbs liquidity from the banking system. Banks lend their surplus funds to the RBI and receive government securities as collateral, so cash leaves the banks. A repo operation does the reverse by injecting funds, and neither automatically changes CRR or SLR.
- ALiquidity is absorbed from the banking systemCorrect
- BLiquidity is injected into the banking system
- CCash reserve ratio is raised automatically
- DStatutory liquidity ratio is reduced automatically
Explanation
In a reverse repo, banks park surplus funds with the RBI against government securities, so money moves from banks to the RBI. This absorbs liquidity. Repo does the opposite, injecting liquidity. CRR and SLR are separate tools not changed by these operations.
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