BANKING GENERAL KNOWLEDGE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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More liquidity in the market
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Less liquidity in the market
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No change in the liquidity in the market
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Mobilization of more deposits by commercial banks
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Detailed explanation-1: -Bank rate refers to the rate at which RBI provides long-term borrowings to its clients. A decrease in bank rate will make borrowing from RBI cheap which will eventually lead to an increase in the money supply in the market i.e. higher liquidity.
Detailed explanation-2: -How does RBI manage liquidity? The Reserve Bank of India (RBI), under its Liquidity Adjustment Facility, infuses liquidity in the banking system via repos and sucks it out using reverse repos. The RBI, after assessing liquidity conditions, uses a 14-day variable rate repo and/or reverse repo operation.
Detailed explanation-3: -When RBI wants to reduce liquidity in the banking system, it increases the CRR as it reduces the money supply in the economy.
Detailed explanation-4: -Marginal Standing Facility (MSF) Rate: The penal rate at which banks can borrow, on an overnight basis, from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a predefined limit (2 per cent). This provides a safety valve against unanticipated liquidity shocks to the banking system.
Detailed explanation-5: -When SLR is reduced, banks have more money to lend which may lead to a decrease in lending rates. By changing the level of SLR, the Reserve Bank of India can increase r decrease bank credit expansion.