Economics • Banking & FinanceMedium
What mechanism does the Reserve Bank of India utilize to manage liquidity fluctuations caused by heavy procurement operations of food grains by state agencies in Punjab?
A. Targeted Open Market Operations and Liquidity Adjustment Facility windows✓ Correct Answer
B. Direct seizure of commercial bank vault cash without notice
C. Mandatory suspension of all rural branch lending operations during harvest months
D. Issuance of municipal bonds by village panchayats
💡 Solution & Explanation
Procurement operations require massive short-term liquidity, which the central bank manages through Liquidity Adjustment Facility repo auctions and Open Market Operations to stabilize the banking system. Seizing vault cash is unlawful and impractical. Suspending rural lending would paralyze agricultural supply chains. Village panchayats lack the legal authority to issue municipal bonds for central banking liquidity control.
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