| Pub. Date | : October, 2021 |
|---|---|
| Product Name | : The IUP Journal of Accounting Research and Audit Practices |
| Product Type | : Article |
| Product Code | : IJARAP431021 |
| Author Name | : Davinder Suri* |
| Availability | : YES |
| Subject/Domain | : Finance |
| Download Format | : PDF Format |
| No. of Pages | : 8 |
The Reserve Bank of India (RBI) introduced the revised liquidity management framework on June 6, 2019, by way of its Statement on Developmental and Regulatory Policies with the aim to simplify the liquidity framework by enhancing the clarity in communication of its objectives and adding variety in the toolkit to manage liquidity efficiently. The liquidity management framework allows the RBI to control cash in the banking system, and this, in turn, is a key tool to manage interest rates in a manner to align them with the policy rate. The central bank has at its disposal a combination of tools that may include fixed and variable rate repo/reverse repo auctions, Open Market Operations (OMOs), and forex swaps. During 2020-21, the Reserve Bank undertook several conventional and unconventional measures to address liquidity constraints in the face of Covid-19 related challenges. The timely and unorthodox response of the RBI eased financial stress, unclogged monetary transmission and credit flows, while ensuring financial stability. Financial market sentiments were bolstered while ensuring orderly market conditions with more than adequate system liquidity. Interest rates and bond yields fell across market segments along with narrowing in spreads to pre-Covid levels. With the aim to bolster growth in the economy, besides strengthening monetary transmission, the RBI is striving to actively engage in stimulating the flow of bank credit to productive sectors that have strong multiplier effects.
Evolution of Liquidity
Management Framework
The Interim Liquidity Adjustment Facility
(ILAF), introduced in April 1999, has
undergone changes over the past twenty
years in response to dynamic domestic
conditions as well as global developments.
The "Working Group on Operating Procedure
of Monetary Policy" (Chairman: Deepak
Mohanty, RBI, 2011) recommended the repo
rate to be the unambiguous signal for the
monetary policy stance ensuring price