If surplus capital inflows are taken into balance sheet of the RBI, other instruments such as market stabilisation scheme (MSS)6 bonds and cash reserve ratio (CRR) could be utilised to bring the system into deficit mode. However, occasionally it may not be possible to bring the system into deficit mode despite deployment of all instruments as was seen during 2006–08.
In recognition of the fact that monetary transmission will be better if the liquidity in the system is in deficit, the Reserve Bank’s position on liquidity as articulated in the recent monetary policy statements aims to “.... manage liquidity to ensure that monetary transmission remains effective, without exerting undue stress on the financial system”.7 Challenges on the way forward!