The Reserve Bank of India influences liquidity and interest rates through a number of operating instruments. Which among the below is incorrect ?

The correct answer is - Distorted Bank Policy

Key Points

• Distorted Bank Policy is not an actual monetary tool or instrument used by the Reserve Bank of India (RBI).
  • RBI employs scientific and structured policies to regulate liquidity, interest rates, and inflation effectively.
  • The term "Distorted Bank Policy" does not exist in the context of RBI's official monetary operations or instruments.
• The actual monetary tools used by RBI include:
  • Open Market Operations (OMOs): Buying and selling of government securities in the open market to regulate liquidity.
  • Repos: Short-term borrowing and lending tool between RBI and banks to manage liquidity and interest rates.
  • Change in Bank Rates: Adjusting the rate at which RBI lends money to commercial banks, influencing overall interest rates in the economy.

Additional Information

• Open Market Operations (OMOs)
  • RBI engages in buying or selling government securities to control money supply and liquidity in the economy.
  • When RBI sells securities, it reduces liquidity in the market, and when it buys securities, it injects liquidity.
• Repos
  • Repo rate is the rate at which RBI lends money to commercial banks for short durations.
  • It is used to control inflation and stabilize liquidity in the economy.
  • Reverse repo rate is the rate at which RBI borrows money from banks, helping absorb excess liquidity.
• Bank Rates
  • Bank rate is a long-term tool used by RBI to influence lending rates across the economy.
  • Changes in the bank rate affect interest rates for loans and deposits in the banking system.