Trends in Liquidity Management

March 1, 2011 November 22, 2013

The economic survey says that during 2010-11, the Reserve Bank continued its active policy of liquidity management through the LAF (Liquidity Adjustment Facility), CRR (Cash Reserve Ratio) , and OMOs (Open Market Operations)
During 2010-11 so far, the centre’s surplus balance with the RBI has been a key driver of autonomous liquidity. Currency in circulation has been another key determinant of autonomous liquidity.
The liquidity conditions changed significantly during the first quarter of 2010-11. The gradual moderation in volume of surplus liquidity in the system since February 2010 reflected the calibrated normalization of the monetary policy by the RBI. The LAF remained in the absorption mode, though the absorption volume declined gradually.
The LAF window of the RBI, after remaining in surplus mode for nearly 18 months, switched into deficit mode towards the end of May 2010 mainly on account of 3G (3rd generation spectrum) and BWA (broadband wireless access) auctions and the consequent migration of liquidity to the Central Government’s cash balance account with the RBI.
Overall liquidity in the system has remained in deficit consistent with the policy stance, the extent of tightness has been beyond the comfort level of the RBI.