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Understanding Liquidity Management by RBI



Rajesh Goyal 

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There has been a lot of confusion among  bankers as well as students about various concepts used by RBI in liquidity management.  Having worked in Treasury Division of the Bank, I had a chance to deal this on practical basis for long time.   Therefore, I thought of writing about these in simple language alongwith the inputs from RBI circulars.   I hope this will be of great use to young bankers as well as students.

What are the Open Market Operations (OMOs)?

An open market operation (popularly also known as OMO) is an activity by a central bank to buy or sell government securities  on the open market.  Central banks use these operations as the primary means of implementing monetary policy.

Thus we can say that in India OMOs are the market operations conducted by the Reserve Bank of India (it is central bank of India) by way of sale/ purchase of Government securities to/ from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.

Sale of Government Securities :

When the RBI feels there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity. It is simple operation, wherein RBI sells the government securities to banks, who pay for these investments.  Thus excess liquidity goes to RBI.

Purchase or  BuyBack of Government Securities :

When RBI feels that the liquidity conditions are tight, it will purchase  / buy back  securities from the market, thereby releasing liquidity into the market.  Under this operation, RBI purchases government securities from banks and thus pays the bank equivalent amount to banks.  Thus, liquidity is injected into the system.


What is buyback of Government securities and What Are its Results ?

Buyback of Government securities is a process whereby the Government of India and State Governments buy back their existing securities from the holders.  The buy back of securities by RBI is done to achieve any one or all  results:-

(i)            The objectives of buyback can be reduction of cost (by buying back high coupon securities),

(ii)           reduction in the number of outstanding securities; and

(iii)          improving liquidity in the Government securities market (by buying back illiquid securities) and infusion of liquidity in the system.

Governments make provisions in their budget for buying back of existing securities. Buyback can be done through an auction process or through the secondary market route, i.e., NDS/NDS-OM.


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What is Liquidity Adjustment Facility (LAF)?

LAF is a facility extended by RBI to scheduled commercial banks (excluding RRBs) and primary dealers to avail of liquidity in case of requirement or park excess funds with the RBI in case of excess liquidity on an overnight basis against the collateral of Government securities including State Government securities.

As we have seen above OMO is also a liquidity management tool in the hands of RBI, but that is a tool used to adjust long term liquidity in the banking system.   However,  LAF enables liquidity management on a day to day basis.

The operations of LAF are conducted by way of repurchase agreements (repos and reverse repos with RBI being the counter-party to all the transactions.  The latest rates can be viewed at or also at our website


Repo market

Repo : We have seen above LAF and now that it is conducted through Repos and Reverse Repos.  The Repo is also known as ready forward contact, and is an instrument for borrowing funds by selling securities with an agreement to repurchase the said securities on a mutually agreed future date at an agreed price which includes interest for the funds borrowed. Thus under Repo, banks borrow from RBI and thus liquidity comes to banking system.

Reverse Repo : The reverse of the repo transaction is called ‘reverse repo’ which is lending of funds against buying of securities with an agreement to resell the said securities on a mutually agreed future date at an agreed price which includes interest for the funds lent.   Thus, under Revere Repo banks lend money to RBI and thus liquidity reduces in the banking system.

Thus, we can conclude that there are two legs to the same transaction in a repo/ reverse repo. The duration between the two legs is called the ‘repo period’. Predominantly, repos are undertaken on overnight basis, i.e., for one day period. Settlement of repo transactions happens along with the outright trades in government securities.

Now from June 2014, RBI has also started conducting Term Reverse Repo too, under which the Reverse Repo is done for periods longer than overnight.  On 2nd June 2014 it conducted 4 day Term Reverse Repo.   Now onwards RBI will conduct these even for longer periods.

Collateralised Borrowing and Lending Obligation (CBLO)

This is another money market instrument used in India.  This is  operated by the Clearing Corporation of India Ltd. (CCIL), for the benefit of the entities who have either no access to the inter bank call money market or have restricted access in terms of ceiling on call borrowing and lending transactions.

CBLO is a discounted instrument available in electronic book entry form for the maturity period ranging from one day to ninety days (up to one year as per RBI guidelines). In order to enable the market participants to borrow and lend funds, CCIL provides the Dealing System through Indian Financial Network (INFINET), a closed user group to the Members of the Negotiated Dealing System (NDS) who maintain Current account with RBI and through Internet for other entities who do not maintain Current account with RBI.


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