LAF- is a monetary policy tool which
allows banks to borrow money through repurchase agreements from RBI.
It is used to aid banks in adjusting the day to day mismatches in liquidity. LAF consists of repo and reverse repo operations.
Banks borrow money from Reserve bank of India to meet short term needs by selling securities to RBI with an agreement to repurchase the same at predetermined rate and date.
minimum bid for LAF is 5 crore and in multiple of 5 crore..
Securities which are used are transferable Central Govt. dated securities and treasury bills.
suppose dodo (SBI) needs Rs.80 from RBI. dodo goes to RBI and asked them to give me rs80, but RBI is not his father-in-law, SUBBU will ask for some thing in return na.....
so dodo provide them security and say that i will buy my security paying rs100 when india-australia series gets over...
now dodo got Rs.80 but promised to pay Rs.100... this difference is the interest (the repo rate) and agreement of buying back the security is the repurchase agreement.....
Repo Rate- is the rate of interest at which RBI subscribe government security to other SCB.
Or repo rate is the interest rate that RBI charges from SCB when they borrow for short period of time i.e upto 90.
Banks borrow money from Reserve bank of India to meet short term needs by selling securities to RBI with an agreement to repurchase the same at predetermined rate and date.
The rate charged by RBI for this transaction is called the repo rate. Repo operations therefore inject liquidity into the system.
Reverse repo rate- is the rate of interest that reserve bank of india pays to the commercial bank when they park their excess liquidity with the RBI.
Reverse repo operation is when RBI borrows money from banks by lending securities. The interest rate paid by RBI is in this case is called the reverse repo rate. Reverse repo operation therefore absorbs the liquidity in the system.
NOTE- CRR is also parked with RBI , but it does not fetch any interest. The money deposited above the CRR will fetch interest which is 100 basis point or 1% below the repo rate.
MSF- is the scheme through which bank can borrow up to 2% of their net demand and time liabilities from RBI for 24 hours or one overnight. The interest charged by RBI is 1% more than the repo rate.
the minimum amount that can be borrowed is 1 crore and after that in multiples of 1 crore.
this facility reduces volatility in overnight rate.
Now if have read carefully you will find that both REPO and MSF are short term loan borrowed by banks from RBI. Interest on MSF is more than that on REPO. SO why any bank will go for MSF???
What is the difference between the two ??????
REPO- borrowed by plegding G SECS over and above the SLR requirement of bank... whereas MSF is borrowed on certain percentage of NDTL well within the SLR requirement.. or you can say that MSF is borrowed to maintain SLR...
FOR SLR and CRR click here
ARCHIVES
It is used to aid banks in adjusting the day to day mismatches in liquidity. LAF consists of repo and reverse repo operations.
Banks borrow money from Reserve bank of India to meet short term needs by selling securities to RBI with an agreement to repurchase the same at predetermined rate and date.
minimum bid for LAF is 5 crore and in multiple of 5 crore..
Securities which are used are transferable Central Govt. dated securities and treasury bills.
what is repurchase agreement????
lets understand it in layman language..suppose dodo (SBI) needs Rs.80 from RBI. dodo goes to RBI and asked them to give me rs80, but RBI is not his father-in-law, SUBBU will ask for some thing in return na.....
so dodo provide them security and say that i will buy my security paying rs100 when india-australia series gets over...
now dodo got Rs.80 but promised to pay Rs.100... this difference is the interest (the repo rate) and agreement of buying back the security is the repurchase agreement.....
Repo Rate- is the rate of interest at which RBI subscribe government security to other SCB.
Or repo rate is the interest rate that RBI charges from SCB when they borrow for short period of time i.e upto 90.
Banks borrow money from Reserve bank of India to meet short term needs by selling securities to RBI with an agreement to repurchase the same at predetermined rate and date.
The rate charged by RBI for this transaction is called the repo rate. Repo operations therefore inject liquidity into the system.
Reverse repo rate- is the rate of interest that reserve bank of india pays to the commercial bank when they park their excess liquidity with the RBI.
Reverse repo operation is when RBI borrows money from banks by lending securities. The interest rate paid by RBI is in this case is called the reverse repo rate. Reverse repo operation therefore absorbs the liquidity in the system.
NOTE- CRR is also parked with RBI , but it does not fetch any interest. The money deposited above the CRR will fetch interest which is 100 basis point or 1% below the repo rate.
MSF- is the scheme through which bank can borrow up to 2% of their net demand and time liabilities from RBI for 24 hours or one overnight. The interest charged by RBI is 1% more than the repo rate.
the minimum amount that can be borrowed is 1 crore and after that in multiples of 1 crore.
this facility reduces volatility in overnight rate.
Now if have read carefully you will find that both REPO and MSF are short term loan borrowed by banks from RBI. Interest on MSF is more than that on REPO. SO why any bank will go for MSF???
What is the difference between the two ??????
REPO- borrowed by plegding G SECS over and above the SLR requirement of bank... whereas MSF is borrowed on certain percentage of NDTL well within the SLR requirement.. or you can say that MSF is borrowed to maintain SLR...
FOR SLR and CRR click here
ARCHIVES
it is useful. thank u.
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