RBI, Liquidity & Inflation
(The following article appeared in CNBC TV18 online, per link below: https://www.cnbctv18.com/views/view-rbi-liquidity-and-inflation-7959311.htm ) RBI, Liquidity & Inflation On Friday, RBI announced that it would restore normal liquidity operations in a phased manner, while ensuring ample liquidity in the system. Since March 2020, we have seen consistent banking liquidity surpluses of over INR 6 lakh crores. What should be the way forward for liquidity? Banking Liquidity Surpluses & Money Supply ‘Banking liquidity surpluses’ are funds held by banks with the RBI, in excess of their Cash Reserve Ratio (CRR) requirements. These surpluses arise when RBI reduces statutory CRR requirements, or when it purchases bonds or foreign currency from banks, or when currency is deposited with banks (see here ). Banking liquidity surpluses are not directly available for consumption or asset purchases. However, persistent surpluses goad banks to lend more and reduce short-term in