Sterilisation First Step Towards Liquidity Management
The Reserve Bank of India (RBI) has identified innovation in the use of available instruments to deal with expected capital flows as the key issue, both for day to day liquidity management and for equitable delivery of credit.
To this effect, sterilisation is a first stage response for ongoing liquidity management until more durable policies could be put in place to absorb capital flows for the expansion of productive capacity, the 2003-04 annual report of the central bank said today.
The intervention activity of the regulator has to be seen in the light of the fact that the conduct of monetary policy is faced with the dilemma of surplus liquidity in financial markets together with inadequate credit demand in the context of financing sustained growth in the real sector, the report said.
It took note of the fact that though banks have improved their profitability by passively investing largely in government securities and reaping trading gains with the declining yields, the phenomenon does not provide much room for comfort in the medium term.
Therefore, the report noted, refinements in operating procedures of the RBI in liquidity management become significant, which is further outlined in the context of the soft interest rate stance and the need to maintain adequate liquidity in the financial markets, while ensuring narrowing of the operating spreads in policy rates as well as market related rates.
The RBI annual report expressed hope that market conditions in the medium term could be managed through a narrow interest rate corridor to fine-tune the monetary policy operations with the progressive integration of different segments in the financial market.
On the other hand, internationalisation of monetary policy arising from the cross border integration of markets has made the discretion in the conduct of domestic monetary policy more challenging, the report added.
This makes imperative the need for clarity in rules and responsibilities of monetary policy for ensuring effective macro economic policy co-ordination.
However it could be observed that sterilisation so far has resulted in effective liquidity management as reflected from the reserve money growth which has declined on year on year basis.