Q.19 Write a short note on the revised liquidity management framework (LMF) put in place recently by the RBI. Also

describe the rationale behind this revision.

Ans. In August 2014, the RBI announced a revised Liquidity Management Framework (LMF) Major features of the LMF is as given below:

• RBI started conducting 14-day term repurchase auctions four times a fortnight, up to an aggregate amount equal to 0.75% of the system’s deposit base or net demand and time liabilities (NDTL).

• Unlike earlier, RBI has announced a fixed schedule for these 14-day term repo operations, which are used by banks for their day-to-day liquidity requirements. One-fourth of the total amount of 0.75 per cent of NDTLs would be put up for auction in each of the four auctions, RBI said in a statement.

• No change in the amount that banks can access from the liquidity adjustment facility (LAF) window at fixed repo rate of the time. Banks are currently allowed to borrow up to 0.25 per cent of their deposit base or NDTL from the LAF window.

• Additionally, RBI conducts overnight variable rate repo auctions based on an assessment of liquidity in the system and government cash balances available for auction for the day.

The revised policy framework has been put in place to check volatility in the inter-bank call money markets, where banks lend to each other, and also allow the lenders to manage their liquidity needs better. Better interest signalling and medium-term stability in the loan market are other objectives of it.