Over the next few months, the pangs of currency exchange preoccupied the nation, but when the definitive history of that time is documented, the RBI’s valiant defence of financial stability, right from the morning after, will hopefully receive its due. As the withdrawn currency notes were returned by the public, deposits flooded into banks and swamped them with idle reserves.
A wall of liquidity started moving through financial markets, threatening to take down everything in its path – interest rates; yields; exchange rates; asset prices. Standing alone between the ocean of liquidity and financial chaos, the RBI mounted an extraordinary liquidity absorption strategy.