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Convertibility, Reserve, Sterilization

The document discusses international liquidity, highlighting its components such as foreign exchange reserves and borrowing facilities, as well as measures for adequacy. It also covers currency convertibility, detailing the current and capital account transactions, and the impact of foreign currency interventions on money supply. Additionally, it explains the Marginal Standing Facility (MSF) and Liquidity Adjustment Facility (LAF) as tools used by the RBI to manage liquidity in commercial banks.

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13 views6 pages

Convertibility, Reserve, Sterilization

The document discusses international liquidity, highlighting its components such as foreign exchange reserves and borrowing facilities, as well as measures for adequacy. It also covers currency convertibility, detailing the current and capital account transactions, and the impact of foreign currency interventions on money supply. Additionally, it explains the Marginal Standing Facility (MSF) and Liquidity Adjustment Facility (LAF) as tools used by the RBI to manage liquidity in commercial banks.

Uploaded by

rajeshkumarjena2350
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

International Liquidity

- Capacity of the country to access financial resources and facilities officially


to settle imbalance in international payments.
- Components are i. gold and foreign currency in the reserve ii. borrowing
facilities from IMF iii. SDRs iv. borrowing capacity of country in international
market
- Foreign exchange reserve i. to meet international obligations ii. intervene in
foreign exchange market.
- the measures are :
a. forex reserve equal to three months import (import adequacy)
b. import plus debt servicing (debt adequacy)
c. ratio of short term debt and portfolio stock to reserve (capital adequacy)
d. net foreign exchange assets to currency ratio (monetary adequacy)
- cost benefit analysis of holding reserves
Currency Convertibility
Both residents and non-residents have full discretion to use the currency
for whatsoever. Varying degree of restriction and control.
Convertible under Current ( give rise to use of country income) or Capital
Account (alter assets or liabilities including contingent liabilities)
i. Current Account : imports/exports of merchandise and invisibles ,
inward private remittance , government grant , pension payments
ii. Capital account : FDI / FPI , investments (other) , government loans ,
iii. Rupee allowed to be converted on current account.
Intervention
- sale of foreign currency have squeezing impact of money supply
- purchase of foreign currency have expansionary impact on money
supply
- Sterilized Intervention
- sale or purchase of foreign currency followed by
- purchase or sale of domestic currencies or securities in same size as
first transaction
Marginal Standing Facility (MSF)
i. Schedule Commercial Banks : obtain overnight liquidity. Emergency
facility by RBI if interbank liquidity dries up
ii. MSF rate > Repo rate. The MSF rate is pegged 100 basis points
above the repo rate. Under MSF banks can borrow funds up to
one percentage of their net demand (savings/current account)
and time liabilities (fixed deposits).
iii. CRR is percentage of deposit kept with RBI. SLR is the minimum
percentage of deposit to kept in form of liquid cash , gold and
other securities.
iv. Bank resort to MSF to get overnight loan by dipping into SLR.
v. bank rate / repo rate / reverse repo rate /SLR / NDTL
Liquidity Adjustment Facility ( LAF)
i. Monetary tool by RBI to manage commercial banks liquidity
demand on day to day basis.
ii. borrow money via repo or park excess funds with RBI at reverse
repo.
iii. Components of LAF:

a. Repo Rate
b. Reverse Repo Rate
c. Long Term Repo Operation
i. Repo rate / repurchase rate. interest charged by RBI for short term
loans to commercial banks. Bank can sell govt securities , corporate
securities or any other securities allowed by government to obtain
funds from RBI. But agree to repurchase them at a later date at
mutually agreed price.
ii. Overnight repo : repo with a single day maturity. The Indian market
is dominated.
iii. Term Repo : Repo that fixed maturity longer than one day.
iv. Reverse repo : RBI borrows from bank. mop up excess liquidity ,
reduce money supply , reduce NPA.
v. Long Term Repo Operation : provide liquidity for 1 to 3 year
requirements

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