Reserve Bank is, however, constantly reviewing its policy and would consider further relaxations keeping in view the needs of market participants and imperatives of financial stability. 22. In the context of liquidity, I would like to make a broader point which market bodies like FIMMDA & the market participants need to ponder over. Liquidity, like many other market concepts, is a self-fulfilling one.
An instrument is as liquid as the participants believe it to be. If more participants believe that an instrument is liquid and evince buying interest, it “becomes” liquid. While the product design, trading systems, regulatory dispensations, etc. do have an impact on the liquidity of an instrument, more importantly, it is the activity by the participants that makes the instrument liquid.