DMPQ- Discuss the various quantitative and qualitative measures implemented by RBI to manage liquidity in market.

RBI thus has certain quantitative and qualitative tools through which it manages  liquidity and they are as follows:

Cash Reserve Ratio (CRR)

Every bank has to retain a certain percentage of its  demands and time liabilities in cash with the RBI which can be raised by the RBI to  drain out excess liquidity or reduced to release the liquidity in the economy.

CRR as a monetary tool which has to be carefully used by the RBI keeping  in view all aspects of the economy and not merely decreasing liquidity for fears of  inflation. Frequent use of the CRR, especially their increase by any central bank of a  country sends negative sentiments in the economy. Changes in CRR are necessary in  exceptional circumstances or adverse developments in the economy rather than being  frequently used as a monetary tool for managing liquidity.

Statutory Liquidity Ratio (SLR)

This is another monetary tool of the RBI, in  terms of which every bank is required to set aside again a certain percentage of their  demand and time liabilities and retain as cash with RBI, or in gold with the RBI or  invested in government securities. The banks prefer to invest in government securities  as it earns them interest. At present, a minimum 20% (effective from August 2017)  time liabilities are to be invested. Banks have, however, parked greater than the  minimum stipulation in government securities and is thus today an in-effective tool  to managing liquidity.

Bank Rate

It is the rate of interest charged by RBI for lending money to banks against  eligible securities. In the era of controlled and regulated banking, bank rates were raised  to discourage banks to borrow from RBI for increasing liquidity as a way to reduce  liquidity. It also served as a bench mark for determining other rates of interest by the RBI.  Bank rate though still continuing is not used as a tool for liquidity management by RBI  as there is already a secondary market for such securities and it has lost its significance.  It presently uses as a penalty rate imposed by RBI on banks for violations of RBI  directives.

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