Mr. P Krishnamurthy, Ex-Cgm Rbi

Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
Mr. P Krishnamurthy,
Ex-CGM RBI
25/06/14
1
The presentation has extensively drawn

from RBI speeches, papers and data
to ensure clarity and authenticity..
The Construct….
The Monetary Policy and Liquidity
Markets and Instruments
The Linkages
RBIs Operations
Certain Issues…
.
Mkt
&Instrume
nts
Liquidity
RBI
MP Operations
.
LIQUIDITY
The liquidity is differently

presented to describe financial
various flows with a wide ranging
spectrum of institutions
encompassing the central bank to
the banking system.
.
The autonomous factors that influence

liquidity together with the monetary
authorities action impact the level of
reserves of banks with the Central
Bank.
Liquidity for central banks

refers to the
monetary base (currency and
reserves of the banking
system), of which it is the
solitary
supplier.
The changes in the excess reserve defines the

liquidity . Liquidity Adjustment Facility (LAF)
outstanding indicates liquidity condition of the
market and the course of action authorities would
take.
Global Liquidity
Official Liquidity
Macroeconomic Liquidity
Market Liquidity
Funding Liquidity/
25/06/14
10
Monetary Policy……….
Certain aspects of regarding MP are relevant.

Basically monetary policy is understood to be for price
stability.
However MP traverse beyond price stability like growth

and financial stability.
An important aspect is the authorities management of

liquidity is at the shorter end of the yield curve through the
markets..
25/06/14
11
Transmission
Instruments
Operataing Procedures
25/06/14
12
Transmission…………………
…
The transmission process is through the use of

monetary policy instruments for
controlling the operating targets (like bank
reserves) consistent with intermediate
targets such as money supply/interest rate.
*Op target.Wt avg of overnight rate

Transmission Process.
.
Change in official interest rates

Affects banks and money-market interest
rates
Affects expectations
Affects asset prices
Affects saving and investment decisions
Affects the supply of credit
Operating Framework
Stance……………
The central bank’s liquidity management
operations encompass discretionary injections or
withdrawals of primary money from the financial
system at its own initiative, its accommodation
policy comprises operations to meet the demand
for liquidity from market participants.
Successful market liquidity management requires

that the daily level of excess reserves in the
banking system be close to the level demanded by
banks
The Instruments……………..
Generally for central banks the monetary

policy instrument is the short-term interest
rate the variations.
The rates of return on various instruments,
adjusts efficiently if the transmission
mechanism
is efficient.
Instruments.Approach……
Central banks have moved away
from conventional instruments of monetary
control (working through the quantum channel)
towards more use of indirect instruments.
Accordingly, the use of reserve requirements and
direct credit controls has been gradually
de-emphsised, while relying more on interest rates
for signaling the monetary policy stance. The
strategy has been to exert direct influence
only on short-term interest rates and market
expectations to influence long-term interest
rates through financial market inter-linkages
Liquidity Linkages
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Relationship among various

liquidity .
Reserve Bank can tighten or ease the price of liquidity
under the LAF at which commercial banks can fund their
liquidity requirements PRICE
Macroeconomic liquidity is closely related to balance sheet
liquidity since the Reserve Bank accepts only SLR
securities from bks for the purpose of LAF Funding
Market liquidity is also an important consideration in the
provision of liquidity under LAF as reflected in the
differential provision of the margins for LAF sec.
State/Central GOV securities. Market
The securities chosen for overnight liquidity management
need not necessarily be liquid; being eligible for LAF
Factors impacting liquidity
25/06/14
21
Autonomous Drivers of Liquidity (1+2+3+4)

1.RBI’s net Purchase from Authorised Dealers
2.Currency with the Public
3.Cash balances of the Centre with the Reserve
Bank
4.Others (residual)$
Management of Liquidity (5+6+7+8)
5.Liquidity impact of LAF Repos MSF ETC
6.Liquidity impact of OMO (net) *
7.Liquidity impact of MSSand
8.First round liquidity impact due to CRR change
Bank Reserves # (A+B)
The autonomous factors of liquidity

.
Deposits
and credi
growtht
Currency
Govt Financial in
Balances Stability circulatio
n
Forex
Flows
Issue Department BS
Liabilities
Notes in Circulation
Notes held in Banking Department
TotalLiabilities(TotalNotesIssued)
Assets
Gold Coin and Bullion
Foreign Securities
Rupee Coin
Government of India Rupee Securities
Government’s bulk Receipts.

Capital Flows and RBI
Response
Source RBI
.
Credit growth leads to

increase in money supply
through money supply
through the money multiplier
process.
25/06/14
27
An
increase (decrease) in currency
demand reduces (increases) the
availability of liquidity.
The demand for currency is
influenced by seasonal factors or
exceptional
events .
25/06/14
28
Discretionary Drivers of
Liquidity
25/06/14
29
The factors ,liquidity and RBI

Deposit
.
s and
RBI credi
growtht
Currency
Govt Financial in
Balances System circulatio
n
Forex
Flows
RBI AND DISCRETIONARY FLOWS
.AA
LAF
WMA
OMO
RBI MS
S
CRR/SLR
MSF/
Fx OTH
iNT ERS
FWD
Some Events of Interest.

Capital in flows 2002-03 to mid 2008-09
Fin Crisis & Capital out flow from Sep 2008-09
Capital ouflow since Sep 2011.
Coal India IPO
2G auction
Tightening upto Aug 2013
Tightening continuing after Aug 2013
Certain Issues
Liquidity Forecast.
Govt Balances.
Term Money Market.
Active Govt sec Market.
Corporate Bond market.
Cap on Borrowing and Lending
Govt Balances with RBI.
Liquidity Forecasting
Liquidity assessment exercise is to forecast
different
components of the central bank balance
sheet to estimate liquidity that
would be needed to be injected or with
drawnin so as to achieve its
operating target and to generally preclude
undue
volatility in (short-term) interest rates
Thank You
Information herein is believed to be reliable but Arjun Parthasarathy
Editor: INRBONDS.com and Zephyr Financial Publishers Private
Limited does not warrant its completeness or accuracy. Opinions and
estimates are subject to change without notice. This information is
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Copyright © INRBONDS.com by Arjun Parthasarathy 2013
25/06/14
35

Mr. P Krishnamurthy, Ex-Cgm Rbi

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Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai

The presentation has extensively drawn

The liquidity is differently

The autonomous factors that influence

Liquidity for central banks

The changes in the excess reserve defines the

Certain aspects of regarding MP are relevant.

However MP traverse beyond price stability like growth

An important aspect is the authorities management of

The transmission process is through the use of

*Op target.Wt avg of overnight rate

Change in official interest rates

Successful market liquidity management requires

Generally for central banks the monetary

Relationship among various

Factors impacting liquidity

Autonomous Drivers of Liquidity (1+2+3+4)

The autonomous factors of liquidity

Government’s bulk Receipts.

Credit growth leads to

The factors ,liquidity and RBI

RBI AND DISCRETIONARY FLOWS

Some Events of Interest.

Copyright © INRBONDS.com by Arjun Parthasarathy 2013

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