RBI Role In Money Markets

And Monetary Policy

Introduction of RBI
And Money Markets

RBI
The Reserve Bank of India (RBI) is the central bank of India,
established on April 1, 1935, under the Reserve Bank of India
Act, 1934. It was created to regulate the issue of currency,
maintain monetary stability, and ensure a sound financial
system in the country. Initially set up in Kolkata and later
moved to Mumbai in 1937, the RBI was nationalized in 1949,
making it fully owned by the Government of India

Money
Money is a medium of exchange that facilitates the
buying and selling of goods and services. In ancient
times, people used the barter system, where goods
were exchanged directly for other goods. However,
this system had many limitations, such as the lack of a
common measure of value and the difficulty of finding
someone with the exact goods needed.
Objectives Functions

Issue of Currency
Monetary Stability Monetary Authority
Financial Stability Bankers' Bank
Economic Growth Government's Banker and
Exchange Rate Stability Debt Manager
Control of Credit Developmental Role
Overview of
Indian Market
PARTICIPANTS INSTRUMENTS STRUCTURE

Commercial Banks Call Money and Notice Organized Sector

Non-Banking Financial Money Unorganized Sector
Companies (NBFCs) Treasury Bills (T-Bills)
Cooperative Banks and Commercial Papers (CPs)
Regional Rural Banks Inter-Corporate Deposits
Corporations and Large (ICDs)
Companies
 Objectives & Framework of RBI's Monetary policy :-
Objectives of RBI’s Monetary Policy:

• Maintain price stability.

• Ensure adequate flow of credit to productive sectors.

• Support economic growth.

• Stabilize the currency and ensure financial stability.

Monetary Policy Framework (MPF):

• Adopted Flexible Inflation Targeting (FIT) framework (since 2016).

• Inflation Target: 4% Consumer Price Index (CPI) ± 2%.

• Decisions taken by the Monetary Policy Committee (MPC).

• Policy reviewed bi-monthly by RBI.

 Key Instruments: CRR, SLR, Repo, Reverse Repo (overview):-

CRR (Cash Reserve Ratio):

Cash Reserve Ratio (CRR) is the percentage of total deposits that banks must keep with the Reserve Bank of India (RBI) in
the form of cash.
It is decided by the RBI.
Banks cannot use this money for giving loans or investments.
It helps the RBI control the money flow in the country.

SLR (Statutory Liquidity Ratio):

Statutory Liquidity Ratio (SLR) is the minimum percentage of a bank’s total deposits that it must keep in the form of safe
assets like:
Gold
Government-approved securities (like bonds)
Cash

Repo Rate:
Repo Rate is the interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks for a short time.
Banks take loans from RBI when they need money.
They pay interest on that loan — this interest is called the Repo Rate.

Reverse Repo Rate:

Reverse Repo Rate is the interest rate at which RBI borrows money from commercial banks.

Banks deposit their extra money with RBI and earn interest through this rate.
It is the opposite of repo rate.
Cash Reserve Ratio The cash reserve ratio (CRR) is the percentage of banks
total deposits that it must hold in reserve, either as cash or
(CRR) as deposits with the central bank.

Mechanism:
1.The central bank sets the CRR percentages.
2.Banks calculate the required reserve amount based on
their total deposits.
3.Banks maintain the required reserve amount with the
central bank.

Impact on Liquidity:
1.Increased CRR: Reduces the amount of money banks can
lend, thereby reducing liquidity in the market.
2.Decreased CRR: increases the amount of money banks
can lend, thereby increasing liquidity in the market

By adjusting the CRR, the central bank can regulate the

money supply and influence interest rates, ultimately
impacting the overall liquidity in the economy.
Statutory Liquidity
The full form of SLR is Statutory Liquidity Ratio. It is a

Ratio (SLR) mandatory requirement set by the Reserve Bank of India for
commercial banks to hold a certain percentage of their Net
Demand and Time Liabilities (NDTL) in liquid assets such as
cash, gold, or government securities.

SLR Mechanism:

1. Central bank sets a percentage (SLR)

2. Banks invest that percentage of deposits in safe assets
(like government bonds)
3. This reduces the amount of money banks can lend

Impact of SLR on Credit Availability:

- High SLR: Less money available for lending, credit

becomes tighter.
- Low SLR: More money available for lending, credit
becomes easier.
 Repo Rate

What is Repo Rate?

Repo rate is the interest rate at which the Reserve Bank of India lends short-
term funds to commercial banks against government securities.

PURPOSE
To provide liquidity to commercial banks.
To control inflation and regulate economic growth.
To influence market interest rates.

Inflation Control
High Repo Rate = Expensive loans = lower demands = Inflation drops.
Low Repo Rate = Cheaper loans = Boost demand = Economic growth.
 Reverse Repo Rate
What is Reverse Repo Rate?
Reverse Repo Rate is the interest rate at which commercial banks park their
excess funds with the Reserve Bank of India (RBI) for short-term periods.

PURPOSE
To absorb excess liquidity from the banking system
To help control inflation by reducing money supply
To maintain stability in the financial system

Rate Corridor
Reverse Repo < Repo Rate < MSF
It defines the range for short-term interest rates
Helps RBI control liquidity and maintain stability
 LIQUIDITY ADJUSTMENT
FACILITY

WHAT IS LAF? How Liquidity Adjustment Facility Work

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helps address short-term liquidity mismatches in the RBI conducts auctions daily at a predetermined
banking system and maintain price stability. time to facilitate LAF transactions.
These transactions impact liquidity in the system and
overall credit and interest rates.
 Impact of LAF on short term interest
rates and banking liquidity

Impact on Short-Term Interest Rates: Impact on Banking Liquidity:

Repo Rate: Managing Liquidity:
The repo rate, at which banks borrow from the central bank, The LAF allows banks to manage their short-term liquidity needs.
acts as a ceiling for the overnight money market rate. Banks facing a shortage of funds can borrow from the central
Reverse Repo Rate: bank through the repo window, while banks with surplus funds
The reverse repo rate, at which banks lend to the central bank, can lend to the central bank through the reverse repo window.
acts as a floor for the overnight money market rate. Ensuring Financial Stability:
Interest Rate Corridor: By providing a mechanism for banks to borrow or lend funds, the
The LAF operates within a corridor defined by the repo LAF helps to prevent liquidity crises and ensures the smooth
and reverse repo rates. By adjusting these rates, the central bank functioning of the banking system.
can influence the range within which short-term interest rates . Controlling Inflation:
The LAF plays a crucial role in controlling inflation. By adjusting
the repo and reverse repo rates.
 COVID-19 Case Study – RBI Interventions

Repo Rate Cut from 5.15% →4.00% (to support

growth)

Reverse Repo Cut to discourage banks from

parking money with RBI

LTRO (Long Term Repo Operations) → Injected ₹1

lakh crore into banking system

Moratorium on Loans→ Gave relief to borrowers

CRR Reduced from 4% → 3% to improve liquidity

Targeted LTRO → Focused support to sectors like

NBFCs and MSMEs

Outcome →Boosted liquidity, controlled panic,

and supported recovery in stock markets
 IL&FS Crisis (2018): Summary &
RBI’s Role

What Happened? RBI & Govt. Response

IL&FS and some of its group companies defaulted on Commercial Papers RBI conducted a special audit of
(CPs) & Inter-Corporate Deposits worth ₹99,000+ crore in Sept 2018. IL&FS and proposed tightening the
Over-leverage, short-term funding for long-term infra, poor governance & regulatory framework for CICs.
audit failures. Govt replaced board via NCLT (Uday
Credit rating agencies failed to downgrade IL&FS in time despite weak
Kotak-led) estimates to resolve
financials.
₹61000 cr. of debt (around 61%),
resolved ₹45,281 cr as of Mar 2025
Impact but ₹54,074 cr. worth of debt remains
Triggered liquidity freeze in NBFC sector due to which NBFC credit growth unresolved.
fell from 20%+ (pre-crisis) to single digits post-crisis. RBI eased bank lending to NBFCs
sectors like real estate, housing and automobile which highly depends on
NBFC loans were severely hampered.
(10% → 15% exposure).
RBI aggressively purchased
Mutual funds & banks pulled back from NBFC debt.
government securities through
Downgrades & redemptions worsened financial market stress.
OMOs to inject liquidity of over ₹2.9
Numerous Infrastructure projects were stalled and vendors faced payment
delays. lakh crore between Oct.18 to Mar.19
Retail and institutional investors became wary of NBFC’s and infra lenders. Drafted new NBFC liquidity norms in
2019.
 DHFL Collapse – NBFC Regulation Gaps & Monetary
implications

Regulatory & Government

What Happened? Impact of collapse Response
On Jan. 2019 Cobrapost accused DHFL of RBI introduced Scale-Based Regulation
Credit rating agencies sharply
diverting over ₹31,000 crore through shell for NBFCs (2021)categorizing NBFCs into
downgraded several NBFCs, especially
companies for the benefit of its promoters: 4 layers based on size and risk..
those with real estate or retail loan
Kapil Wadhawan, Aruna Wadhawan, and Enhanced audit and governance rules.
exposure. This increased borrowing
Dheeraj Wadhawan. costs for many NBFCs post-DHFL. SEBI tightened norms for credit rating
Alleged crores in political donations, Many retail investors and depositors lost agencies.
possibly violating Section 182 of the confidence in NBFCs after losing money Govt. supported the sector with targeted
Companies Act, 2013. in DHFL's default. liquidity facilities.
NBFCs were not subject to CRR/SLR It was the first instance where the For the first time, RBI used its powers to
requirements, strict asset classification, or Insolvency and Bankruptcy Code, 2016 remove the board of an NBFC under
risk-based supervision like banks. (IBC) was applied to a financial services Section 45-IE of the RBI Act.
Despite serious allegations of misconduct, provider, setting crucial legal precedents. The NCLT approved Piramal Capital &
Indian credit rating agencies continued to DHFL posted a loss of ₹2,223 crore in Q1
Housing Finance Limited’s (PCHFL)
give high safety ratings to DHFL's financial FY19 (Jan–Mar 2019)
resolution plan on June 7, 2021, and the
Bank credit to NBFCs grew from ₹7.3 lakh
products. acquisition was completed in September
crore (Dec 2019) to ₹10.5 lakh crore by
Approximately ₹90,000 crore of debt was 2021. The Piramal Group integrated
Dec 2021
recorgnised when insolvency proceedings DHFL’s assets into its financial services
In November 2019, the Reserve Bank of
began in November 2019 division, marking the first successful
India (RBI) removed DHFL’s board of
Enforcement agencies confirm ₹11,500 cr directors. resolution of an NBFC under the IBC.
siphoned for promoter benefit
 Conclusion
In conclusion, the Reserve Bank of India stands at the core of our financial
system, using powerful tools like CRR, SLR, Repo, Reverse Repo, and LAF to
manage liquidity, control inflation, and ensure economic stability.
Through various monetary policy actions—especially during critical times
like the COVID-19 pandemic, IL&FS, and DHFL crises—the RBI has shown
how timely intervention can stabilize markets and restore confidence.
 Team Members

Mansi Parekh
Aaryan Khandelwal Sachin Gupta
25BSP1263
25BSP2964 25BSP0686

Satyam Sunil
Ankit Barnwal Hritesh Singh
Yadav
25BSP2247 25BSP1686
25BSPO6O4

Divyanshu Mehta
25BSP1876