Role of RBI in the Money Market

The Reserve Bank of India is not merely one participant among many in the money market — under powers granted by the Reserve Bank of India Act, 1934, it is the money market's apex regulator and its most influential operator, and its role can be understood under two broad heads:

As regulator:

• RBI frames the rules and guidelines governing money-market instruments (eligibility to issue Commercial Paper and Certificates of Deposit, permissible maturities, documentation requirements) and the conduct of participants (banks, financial institutions) within the money market.
• RBI supervises commercial banks and financial institutions to ensure they maintain adequate liquidity and follow sound practices in their money-market dealings, since instability in this market can quickly spread to the wider banking system.
• RBI manages the issuance of Treasury Bills on behalf of the Government of India, deciding the amount, maturity and timing of each issue in line with the Government's short-term borrowing needs.

As the institution managing liquidity (monetary-policy operations):

• RBI conducts open market operations — buying and selling government securities in the market — to inject or absorb liquidity as needed to keep short-term interest rates in line with its monetary-policy stance.
• RBI conducts repo and reverse repo operations on a regular (often daily) basis, lending funds to banks against government securities (repo, injecting liquidity) or borrowing funds from banks (reverse repo, absorbing liquidity), directly influencing the cost and availability of short-term funds across the banking system.
• Through the repo rate — the benchmark rate at which RBI lends to banks — the RBI signals and transmits its monetary-policy stance (whether it wants to encourage or restrain borrowing and spending in the economy) into the money market first, from where it filters through to bank lending and deposit rates, and eventually to the broader economy. …