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We often hear the word liquidity used in combination with cash

management. Liquidity is a firm's ability to pay its short-term debt
obligations. In other words, if the firm has adequate liquidity, it can
pay its current liabilities such as accounts payable. Usually, accounts
payable are debts owe to our suppliers.
There are methods we can use to measure liquidity. Financial ratio
analysis will help us determine how liquid firm is or how successful it
will be in meeting its short-term debt obligations. The current ratio
will help us determine the ratio of current assets to current liabilities.
Current assets include cash, accounts receivable, inventory, and
occasionally other line items such as marketable securities. We need
to have more current assets than current liabilities on our balance
sheet at all times.
The quick ratio will allow determining if we can pay your short-term
debt obligations, or current liabilities, without having to sell any
inventory. It's important for a firm to be able to do this because, if we
sell have to sell inventory to pay bills that means we have to find a
buyer for that inventory. Finding a buyer is not always easy or
There is various other measure of liquidity that you will want to use to
determine our cash position.
When your business is just starting up, we essentially run it out of a
check book, which is an example of cash accounting. As long as there
is cash in the account, our business is solvent. As business becomes
more complex, we will have to adopt financial accounting. However,
we have to keep a focus on liquidity and cash management even
though our track net income through financial accounting.

This document sets out the minimum policies and procedures that
each institution needs to have in place and apply within its liquidity
management programme, and the minimum criteria it should use to
prudently manage and control its liquidity.
Although this document focuses on the institutions responsibility for
managing liquidity, and is intended to address liquidity management
within the context of a strategic liquidity plan under ordinary or
reasonably expected business conditions, liquidity management
cannot be conducted in isolation from other asset/liability
management considerations, such as interest and foreign exchange
rate risk, or other risks. However, since liquidity determines the dayto-day viability of an institution, it must remain the principal
consideration of asset/liability management.
Moreover, this document presents the management of liquidity
undifferentiated as to currency denomination, since in principle,
through the foreign exchange markets, commitments in one currency
may be met by the availability of funds in another. However,
institutions that conduct substantial business in foreign currencies
need to make distinctions between the management of liquidity in
domestic currency (Jamaican dollars) and that in other currencies.

Liquidity is the availability of funds, or assurance that funds will be
available, to honour all cash outflow commitments (both on- and offbalance sheet) as they fall due. These commitments are generally met
through cash inflows, supplemented by assets readily convertible to
cash or through the institutions capacity to borrow. The risk of
illiquidity may increase if principal and interest cash flows related to
assets, liabilities and off-balance sheet items are mismatched.


Managing liquidity is a fundamental component in the safe and sound
management of all financial institutions. Sound liquidity management
involves prudently managing assets and liabilities (on- and offbalance sheet), both as to cash flow and concentration, to ensure that
cash inflows have an appropriate relationship to approaching cash
outflows. This needs to be supported by a process planning which
assesses potential future liquidity needs, taking into account changes
in economic, regulatory or other operating conditions. Such planning
involves identifying known, expected and potential cash outflows and
weighing alternative asset/liability management strategies to ensure
that adequate cash inflows will be available to the institution to meet
these needs.
The objectives of liquidity management are:
honouring all cash outflow commitments (both on- and offbalance sheet) on an ongoing, daily basis;
avoiding raising funds at market premiums or through the
forced sale of assets; and
satisfying statutory liquidity and statutory reserve requirements.

Although the particulars of liquidity management will differ among

institutions depending upon the nature and complexity of their
operations and risk profile, a comprehensive liquidity management
programme requires:
establishing and implementing sound and prudent liquidity and
funding policies; and
developing and implementing effective techniques and
procedures to monitor, measure and control the institutions
liquidity requirement and positions

Liquidity Policies in Banks

Sound and prudent liquidity policies set out the sources and amount of
liquidity required to ensure it is adequate for the continuation of
operations and to meet all applicable regulatory requirements. These
policies must be supported by effective procedures to measure,
achieve and maintain liquidity.
Operating liquidity is the level of liquidity required to meet an
institutions day-to-day cash outflow commitments. Operating
requirements are met through asset/liability management techniques
for controlling cash flows, supplemented by assets readily convertible
to cash or by an institutions ability to borrow.
Factors influencing an institutions operating liquidity include:
cash flows and the extent to which expected cash flows from
maturing assets and liabilities match; and
The diversity, reliability and stability of funding sources, the ability to
renew or replace for regulatory purposes an institution is required to
hold a specific amount of assets classed as liquid, based on its
deposit liabilities. Generally, undue reliance should not be placed on
these assets, or those formally pledged, for operating purposes other
than as a temporary measure, as legally they may not be available for
encashment if needed.
In assessing the adequacy of liquidity, each institution needs to
accurately and frequently measure:
the term profile of current and approaching cash flows
generated by assets and liabilities, both on- and off-balance
the extent to which potential cash outflows are supported by
cash inflows over a specified period of time, maturing or
liquefiable assets, and cash on hand;

the extent to which potential cash outflows may be supported

by the institutions ability to borrow or to access discretionary
funding sources; and

The level of statutory liquidity and reserves required and to be


Essentially, operating liquidity is adequate if the institutions

approaching cash inflows, supplemented by assets readily convertible
to cash or by an institutions ability to borrow are sufficient to meet
approaching cash outflow obligations. In this context, because the
timing and amount of these cash flows are not completely predictable
because of risks such as credit defaults, and events including
honouring customer drawdowns on credit commitments, deposit
redemptions, and prepayments, either on mortgages or term loans,
sound and prudent liquidity policies must deal with this uncertainty by
carefully controlling the maturity of assets, ensuring assets are readily
convertible to cash, or securing sources to borrow funds.
Liquid assets should have the following attributes:
diversified, residual maturities appropriate for the institutions
specific cash flow needs;
readily marketable or convertible into cash; and
minimal credit risk.
Holding assets in liquid form for liquidity purposes will often involve
some loss of earnings capacity relative to other investment
opportunities. Nevertheless, the primary objective with respect to
managing the liquid asset portfolio is to ensure its quality and
convertibility into cash.

Funding Policies
Deposit liabilities are the primary source of funding for all
institutions. In this context, an important element of an institutions
liquidity management programme is the diversification of funding by
origination and term structure. Each institution needs to have explicit
and prudent policies that ensure funding is not unduly concentrated
with respect to:
individual depositor;

type of deposit instrument;

market source of deposit;

term to maturity; and
currency of deposit, if the institution has liabilities (both onand off-balance sheet) in foreign currencies.
The primary funding risk is the unplanned deposit withdrawal or the
reduced rate of deposit renewal at the time of maturity. Deposits may
decline due to a loss of confidence in the institution, a general decline
in savings, more attractive investments elsewhere, or as a result of
other factors.
Concentrated funding sources leave the institution open to potential
liquidity problems as a result of such unexpected deposit withdrawal
and may also restrict an institutions flexibility in managing its cash
flow. Institutions with excessive funding concentrations may require
additional liquid assets.
In the context of foreign currency deposits, funding policies also need
to ensure that foreign currency cash flows are prudently managed and
controlled within the policies and procedures set out under the
institutions foreign exchange risk management programme.

Liquidity Management and Control Procedures

Each licensee needs to develop and implement effective and
comprehensive procedures and information systems to manage and
control liquidity in accordance with its liquidity and funding policies.
These procedures must be appropriate to the size and complexity of
the institutions liquidity and funding activities.
Internal inspections/audits are a key element in managing and
controlling an institutions liquidity management programme. Each
institution should use them to ensure that liquidity management
complies with liquidity and funding policies and procedures. Internal
inspections/audits should, at a minimum, randomly test all aspects of
liquidity management in order to:
ensure liquidity and funding policies and procedures are being
adhered to;
ensure effective controls apply to managing liquidity;
verify the adequacy and accuracy of management information
reports; and
ensure that personnel involved in the liquidity management
fully understand the institutions liquidity and funding policies
and have the expertise required to make effective decisions
consistent with the liquidity and funding policies.
Assessments of the liquidity management operation should be
presented to the institutions Board of Directors on a timely basis for

The Board of Directors of each institution is ultimately responsible for
the institutions liquidity. In discharging this responsibility, a Board of
Directors usually charges management with developing liquidity and
funding policies for the boards approval, and developing and
implementing procedures to measure, manage and control liquidity
within these policies.
A Board of Directors needs to have a means of ensuring compliance
with the liquidity management programme. A Board of Directors
generally ensures compliance through periodic reporting by
management and internal inspectors/auditors. The reports must
provide sufficient information to satisfy the Board of Directors that
the institution is complying with its liquidity management
At a minimum, a Board of Directors should:
review and approve liquidity and funding policies based on
recommendations by the institutions management;
review periodically, but at least once a year, the liquidity
management programme;
ensure that an internal inspection/audit function reviews the
liquidity and funding operations to ensure that the institutions
policies and procedures are appropriate and are being adhered
ensure the selection and appointment of qualified and
competent management to administer the liquidity management
function; and
outline the content and frequency of management liquidity
reports to the board.

The management of each institution is responsible for managing and
controlling the day-to-day liquidity of the institution according to the
liquidity management programme.
Although specific liquidity management responsibilities will vary
from one institution to another, management should be responsible
developing and recommending liquidity and funding policies
for approval by the Board of Directors;
implementing the liquidity and funding policies;
ensuring that liquidity is managed and controlled within the
liquidity management and funding management programmes;
ensuring the development and implementation of appropriate
reporting systems
establishing and utilizing a method for accurately measuring the
institutions current and projected future liquidity;
monitoring economic and other operating conditions to forecast
potential liquidity needs;
ensuring that an internal inspection/audit function reviews and
assesses the liquidity management programme
developing lines of communication to ensure the timely,
dissemination of the liquidity; and
reporting comprehensively on the liquidity management
programme to the Board of Director is at least once a year.

Liquidity for a bank means the ability to meet its financial obligations
as they come due. Bank lending finances investments in relatively
illiquid assets, but it fund its loans with mostly short term liabilities.
Thus one of the main challenges to a bank is ensuring its own
liquidity under all reasonable conditions.
Asset Management Banking
Commercial banks differ widely in how they manage liquidity. A
small bank derives its funds primarily from customer deposits,
normally a fairly stable source in the aggregate. Its assets are mostly
loans to small firms and households, and it usually has more deposits
than it can find creditworthy borrowers for. Excess funds are typically
invested in assets that will provide it with liquidity such as Fed funds
loaned and U.S. government securities. The holding of assets that can
readily be turned into cash when needed, is known as asset
management banking.
Liability Management Banking
In contrast, large banks generally lack sufficient deposits to fund their
main business -- dealing with large companies, governments, other
financial institutions, and wealthy individuals. Most borrow the funds
they need from other major lenders in the form of short term liabilities
which must be continually rolled over. This is known as liability
management, a much riskier method than asset management. A small
bank will lose potential income if gets its asset management wrong. A
large bank that gets its liability management wrong may fail.

Key to Liability Management

The key to liability management is always being able to borrow.

Therefore a bank's most vital asset is its creditworthiness. If there is
any doubt about its credit, lenders can easily switch to another bank.
The rate a bank must pay to borrow will go up rapidly with the
slightest suspicion of trouble. If there is serious doubt, it will be
unable to borrow at any rate, and will go under. In recent years, large
banks have been making increasing use of asset management in order
to enhance liquidity, holding a larger part of their assets as securities
as well as securitizing their loans to recycle borrowed funds.
Bank Runs
A bank run is an overwhelming demand for cash by a bank's
depositors. With the advent of deposit insurance, bank runs by small
depositors are largely a thing of the past. Insurance is limited to RS
50, 00,000 per deposit, which provides complete coverage to about
99% of all depositors. But it covers only about three-fourths of the
total amount of deposits because many accounts far exceed the
insurance limits.
A large depositor assumes a risk and needs to know something about
the bank's own balance sheet. However a healthy balance sheet does
not eliminate all risk. Even if the depositor knows the bank has
adequate liquidity, others may not. Large depositors must therefore be
concerned about what others are likely to believe. A rumor about a
bank, even though unfounded, can trigger a run that causes a solvent
bank to fail.
Possible Solutions
The problems with deposit insurance could be solved by restricting its
coverage to risk-free narrow banks or narrow deposits. A narrow
bank would offer checking deposits and would be allowed to invest
only in safe liquid assets such as T-bills. It could operate as a separate
institution or as a subsidiary of a bank holding company. Only narrow
banks would be eligible for deposit insurance.

Narrow deposits would be checking deposits that could be offered by

any licensed institution on condition that they were secured
exclusively by safe liquid assets. Only narrow deposits would be
eligible for deposit insurance. Thus narrow banks or narrow deposits
would be fully collateralized, and deposit insurance would be
redundant and unnecessary. Ending deposit insurance would greatly
reduce the moral hazard problem in banking.

Importance of liquidity management

The three basic importance of liquidity management are as follows:

The overhaul of the countrys Payments System by the Reserve Bank
of India is bringing about structural and operational changes which
will have a profound effect on the way banks do business and in
particular would effect the treasury departments of the banks and on
the way they manage intra-day liquidity. These changes will create a
need for measurement of payment flows, use of queuing techniques to
regulate payment flows, better communications, and a generally
higher awareness by treasury managers of payments processing.
The problem of liquidity management is also made more complex
because the treasury/funds management departments in banks would
be connecting to different payment infrastructures (RTGS, NDS-SSS,
FX etc) and this will necessitate the management of multiple intra-day
liquidity positions. Banks would be required to put in processes,
procedures and Information Technology systems to establish liquidity
and operational bridges between these various infrastructure and
The causes of liquidity fragmentation can be broadly classified into
the following categories: operational, technical, policy and bank
procedure. It should be noted that the first three classifications refer to
the operations of the payments system while the last refers to the
actual use of the system by participating banks. However, even in this
scenario of liquidity pools if banks stick to the rules of the game
and implement best practices there should be very few payment
problems such as gridlocks, end of day positions and liquidity swaps.
The Liquidity Management Process -

Effective liquidity management requires three-steps in which treasury

identifies, manages and optimizes liquidity. These steps are
interdependent, each requiring the successful implementation of the
other two to optimally manage liquidity.
Identifying liquidity is the foundation from which the entire liquidity
management process depends. It involves understanding the balances
and positions of the institution on an enterprise-wide level. This
requires the ability to access and gather information across the
institution's many lines of business, currencies, accounts and, often,
multiple systems. Identifying liquidity is primarily a function of data
gathering, and does not include the actual movement or usage of
Managing liquidity within a bank's corporate treasury involves using
the identified liquidity to support the bank's revenue generating
activities. This may include consolidating funds, managing the release
of funds to maximize their use, and tasks that "free up" lower-costing
funds for lending or investment purposes to maximize their value to
the institution.
Optimizing liquidity is an ongoing process with a focus on
maximizing the value of the institution's funds. As the strategic aspect
of liquidity management, optimizing liquidity balances requires a
strong and detailed understanding of the financial institution's
liquidity positions across all currencies, accounts, business lines and
counterparties. With this information, the bank's treasury is able to
map the strategic aspects of the institution into the liquidity
management process.
The biggest challenge in the liquidity management process is the
limited time and resources available to treasury.

Basic steps for liquidity managementHow companies are implementing steps to improve their liquidity
management using these three steps:
1. Improve visibility with centralized payment workflow & approval
2. Reduce costs with electronic execution of payments
3. Reduce fraud and erroneous payments
The economic downturn is affecting how financial institutions manage
liquidity in a number of ways. It has particularly affected the liquidity
of financial instrument portfolios, which now need to be thoroughly
This indicates the present scenario of liquidity management Liquidity management procedures are inadequate, and
restrictions are obsolete and prevent business from going
The existing level of control over liquidity and cash flows is no
longer sufficient
Additional volume of liquid reserves needs to be attracted to
close the liquidity gap
Liquidity contingency plans are not realistic in the current
market conditions

Interest Rate & Liquidity Management

Secondary market transactions are conducted to achieve the desired
interest rate risk profile. In addition, liquidity management aims to
minimize liquidity costs on the condition that the bank is able to
satisfy their refinancing requirements at any time, and to fulfill
contractual payment obligations. To manage liquidity, a precise
knowledge of future cash flows is required.
Enterprise Content Management (ECM) solutions from Open Text for
interest rate & liquidity management deliver this functionality with
the following components:
The economic downturn is affecting how financial institutions manage
liquidity in a number of ways. It has particularly affected the liquidity
of financial instrument portfolios, which now need to be thoroughly
If a situation arises
Liquidity management procedures are inadequate, and
restrictions are obsolete and prevent business from going
The existing level of control over liquidity and cash flows is no
longer sufficient
Additional volume of liquid reserves needs to be attracted to
close the liquidity gap
Liquidity contingency plans are not realistic in the current
market conditions
Fair value and maturity of assets as well as conditional
liabilities that could materialise in the current environment need

to be identified Quick decision making often fails to follow the

even faster economic environment
The end-of-the-day report, uploaded from the IT system, is
always late
ALM and risk management teams fail to collaborate
Our Financial Services Advisory Group can help financial institutions
get a more realistic evaluation of their liquidity position and better
understand the condition of their financial instruments portfolio. We
can review financial institutions IT systems and operational structures
as well as the policies and procedures that govern the asset and
liability management system in order to adapt it to the current market
How improvement can be done
Develop and improve liquidity contingency plans under the
crisis conditions
Analyse actual liquidity and evaluate liquidity risk
Assess the relevance and efficiency of models used to analyse
assets and liabilities
Design scenarios and stress tests to analyse the efficiency of
policies and models for liquidity contingency procedures under
the crisis conditions
Develop policies and procedures for liquidity risk management
Develop reporting systems within the asset and liability
management framework, including a system for monitoring
liquidity risk

Analyse actual liquidity and the system of limits to make

recommendations for necessary changes
Develop a methodology for evaluating the deposit base and the
potential growth of accounts receivable due to realised
Test the current IT system architecture and evaluate its
efficiency at maintaining procedures for asset and liability
management. We can also help with selecting IT system
Benefits to a client
Implementation of the standard industry practices used in
Western markets
Consistent asset and liability management standards throughout
the company
Increased transparency in identifying liquidity risk for the
whole company.
Formalised policies and procedures
Enhanced effectiveness and accuracy in evaluating liquidity
risk, communicating this to company management as well as
risk testing and modelling
Automation of report preparation and the collection of
analytical data for asset and liability management
Accurate segregation of duties and responsibilities within the
liquidity management unit and control over liquidity monitoring
performed by the companys management

Pooling for effective liquidity management

Effective liquidity management requires an account structure that
facilitates fast decisions and simplifies transfers between your
accounts. When managing your liquidity, you may wish there were no
borders or different currencies. We can make your wish come true.
Major companies often require a cash pool service. We offer different
solutions, the most effective being a master account with
corresponding sub accounts for subsidiaries and various departments.
All funds are reflected in the master account. This solution minimises
the need for credit facilities and provides better opportunities for
placing excess liquidity in the money market. You can get interest
benefits when accounts and pools in different countries and currencies
are concentrated in Nordea.
The legal and regulatory requirements differ among countries and it is
important for you to know which pooling structures are feasible.
Depending on your company's group structure and business volumes,
you may choose a liquidity management solution that reflects the
current situation and your company's needs.


Forecast - intraday, end of the day, contractual and predictive
Collateral management - consolidated position, pledged, available
Monitor positions, accounts, alerts
Matching - expected vs. actual
Sweeping/ Regulation intraday, automatic/ manual

Flow control - scheduling, releasing, re-routing, channel

Analyze customer behavior, trend analysis, stress testing
Optimize - funding strategy, payment process






Although future events cannot be fully anticipated it is possible to

create a mechanism by which events can be identified and addressed
as they emerge. It is recommended that banks embed within their
liquidity control processes the following concepts:
Identify market changes: each bank should have a process,
formal or otherwise, for spotting market changes that impact
liquidity flows. Once identified such market level trends can be
analyzed for its impact on the banks business.
Identify impact on banks liquidity: impacts on market and
individual liquidity positions can next be projected.
Environmental changes in say the securities market must be
analysed for domino effects on the bank in other markets. A
complete impact assessment can then be reviewed by the bank.
Reconfigure the banks strategic outlook: certain market
developments will be of such significance that banks will
reassess their set of component businesses. Decisions to exit or
enter a business and re-deploy capital may well result. The
nature of short and long term liquidity warehousing may also
change due to these strategic decisions.
Establish tactical responses: as strategic responses to changing
market conditions are developed, they must manifest
themselves in procedural changes to day-to-day

liquidity management practices and the systems used to execute

those practices. Ultimately all changes to financial flows impact
interbank payment systems and member participants. Those
systems and participants will have to alter payment operations
and treasury funding processes as a result of changing strategic
direction. Banks should strive to reduce the number of locations
where used cash balances are available in their current account
with RBI (possible through CFMS) to the absolute minimum
given other practical constraints such as securities settlement
and diversification of credit risks
Communicate changes and initiate training: once plans and
processes are developed they must be adequately distributed
across the organization. Formal training, process documentation
and business continuity plans in support of payment processing
liquidity management platforms are required. Payment
operations an treasury staff must know how to (re)act when
situations present themselves. As changes in the market place
are identified all resulting situations that staff can anticipate
should be identified. Corresponding actions and responsibilities
should also be assigned.
Institutionalize quality assurance: banks should view their intraday liquidity management practices in the larger contexts of
best treasury management
practices and industry
recommendations for payments processing in general. At the
most detailed level banks should also subject their payment
practices to quality standards that relate to both internal and
external service level agreements.


To make the fullest use of the new payments mechanisms and in a
sense be the market maker, banks would need to put in mechanisms to
protect their business interests. These could be as follows:
Systematic treasury management: cross system position
monitoring processes provide critical information to the
treasury department including opening balances, payment
and receipts processed and payments and receipts pending.
Event matrix for contingencies: the event matrix identifies the
array of anticipated events, corresponding action steps and
responsibility for actions. Most (re) actions to gridlock
Dynamic queue management: processes that consider current
and projected liquidity of positions of individual payment
systems can eliminate or reduce the impact of individual bank
gridlock situations and the potential for systemic spillover
Proactive treasury management: when it is not possible to solve
gridlock situations through alternate routing techniques the
treasury department can intervene in the process. For example
temporary shortages in the banks current account with the RBI
can be offset by inter-bank loans where willing counter-parties
are available.


In its Mid-Term Review of the Annual Policy Statement for 2008-09,
the Reserve Bank of India indicated that in the context of the
uncertain and unsettled global situation and its indirect impact on our
domestic economy and our financial markets, it would closely and
continuously monitor the situation and respond swiftly and effectively
to developments. In doing so, the Reserve Bank will employ both
conventional and unconventional measures. Global financial
conditions continue to remain uncertain and unsettled, and early signs
of a global recession are becoming evident. These developments are
being reflected in sharp declines in stock markets across the world and
heightened volatility in currency movements. International money
markets are yet to regain calm and confidence and return to normal
It was also indicated in the Mid-Term Review that the current
challenge for the conduct of monetary policy is to strike an optimal
balance between preserving financial stability, maintaining price
stability and sustaining the growth momentum. Inflation, in terms of
the wholesale price index (WPI), has been softening steadily since
August 9, 2008 and has declined to 10.68 per cent for the week ended
October 18, 2008. Globally, pressures from commodity prices,
including crude, appear to be abating. The moderation in key global
commodity prices, if sustained, would further reduce inflationary
pressures. On the growth front, it is important to ensure that credit
requirements for productive purposes are adequately met so as to
support the growth momentum of the economy. Domestic financial

markets have been functioning normally. Prudent regulatory

surveillance and effective supervision have ensured that our financial
sector has been and continues to be robust. However, the global
financial turmoil has had knock-on effects on our financial markets;
this has reinforced the importance of focusing on preserving financial
The Reserve Bank has reviewed the current and evolving
macroeconomic situation and liquidity conditions in the global and
domestic financial markets. Based on this review, it has decided to
take the following further rmeasures:
(i) On October 20, 2008, the Reserve Bank announced a reduction in
the repo rate under the Liquidity Adjustment Facility (LAF) by 100
basis points from 9.0 to 8.0 per cent. In view of the ebbing of upside
inflation risks as also to address concerns relating to the moderation in
the growth momentum, it has been decided to reduce the repo rate
under the LAF by 50 basis points to 7.5 per cent with effect from
(ii) The cash reserve ratio (CRR) of scheduled banks is reduced by
100 basis points from 6.5 per cent to 5.5 per cent of net demand and
time liabilities (NDTL). This will be effected in two stages: by 50
basis points retrospectively with effect from the fortnight beginning
October 25, and by a further 50 basis points prospectively with effect
from the fortnight beginning November 8, 2008. This measure is
expected to release around Rs.40,000 crore into the system.
(iii) On September 16, 2008, the Reserve Bank had announced, as a
temporary and ad hoc measure, that scheduled banks could avail
additional liquidity support under the LAF to the extent of up to one
per cent of their NDTL and seek waiver of penal interest. It has now
been decided to make this reduction permanent. Accordingly, the
Statutory Liquidity Ratio (SLR) will stand reduced to 24 per cent of
NDTL with effect from the fortnight beginning November 8, 2008.

(iv) In order to provide further comfort on liquidity and to impart

flexibility in liquidity management to banks, it has been decided to
introduce a special refinance facility under Section 17(3B) of the
Reserve bank of India Act, 1934. Under this facility, all scheduled
commercial banks (excluding RRBs) will be provided refinance from
the Reserve Bank equivalent to up to 1.0 per cent of each bank's
NDTL as on October 24, 2008 at the LAF repo rate up to a maximum
period of 90 days. During this period, refinance can be flexibly drawn
and repaid.
(v) On October 15, 2008 the Reserve Bank announced, purely as a
temporary measure, that banks may avail of additional liquidity
support exclusively for the purpose of meeting the liquidity
requirements of mutual funds (MFs) to the extent of up to 0.5 per cent
of their NDTL. A similar facility of liquidity support for non-banking
financial companies (NBFCs) is also found to be necessary to enable
them to manage their funding requirements. Accordingly, it has now
been decided, on a purely temporary and ad hoc basis, subject to
review, to extend this facility and allow banks to avail liquidity
support under the LAF through relaxation in the maintenance of SLR
to the extent of up to 1.5 per cent of their NDTL. This relaxation in
SLR is to be used exclusively for the purpose of meeting the funding
requirements of NBFCs and MFs. Banks can apportion the total
accommodation allowed above between MFs and NBFCs flexibly as
per their business needs.
(vi) As indicated in the Reserve Bank's press release of September 16,
2008, as on some previous occasions, the Reserve Bank will continue
to sell foreign exchange (US dollar) through agent banks to augment
supply in the domestic foreign exchange market or intervene directly
to meet any demand-supply gaps. The Reserve Bank would either sell
the foreign exchange directly or advise the bank concerned to buy it in
the market. All the transactions by the Reserve Bank will be at the
prevailing market rates and as per market practice. Entities with bulk

forex requirements can approach the Reserve Bank through their

banks for this purpose.

(vii) It has been decided, as a temporary measure, to permit

Systemically Important Non-Deposit taking Non-Banking Financial
Companies (NBFCs-ND-SI) to raise short- term foreign currency
borrowings under the approval route, subject to their complying with
the prudential norms on capital adequacy and exposure norms
(viii) Under the Market Stabilisation Scheme (MSS), Government
Securities (treasury bills and dated securities) have been issued to
sterilise the expansionary effects of forex inflows. In the context of
forex outflows in the recent period, it has been decided to conduct
buy-back of MSS dated securities so as to provide another avenue for
injecting liquidity of a more durable nature into the system. This will
be calibrated with the market borrowing programme of the
Government of India. The securities proposed to be bought back and
the timing and modalities of these operations are being notified
The Reserve Bank will continue to closely monitor the developments
in the global and domestic financial markets and will take swift and
effective action as appropriate.

Liquidity Management in India: A Practitioner's View

Rakesh Mohan
Liquidity Management in India" is a subject that is not widely
discussed but is the bread and butter of daily monetary management.
Whereas I was not a monetary specialist prior to coming to the
Reserve Bank, I have been able to gather some insights through onthe-job training. It is also an issue of current relevance and appeal.
Conduct of monetary policy and management in the context of
large and volatile capital flows has proved to be difficult for many
countries. As India became convertible on the current account, and
liberalised its capital account in a carefully sequenced manner since
the balance of payment crisis of 1991, it too has been faced with
similar problems. The evolving policy mix involved careful
calibration that took into account diverse objectives of central
banking, changes in the monetary policy framework and operating
procedures, and widening of the set of instruments for liquidity
Before opening of the economy through the 1990s, both the
current and capital accounts were controlled. However, despite trade
restrictions the current account was in constant deficit, which had to
be financed mostly by debt, both official aid flows and private debt.
Portfolio flows were not permitted and foreign direct investment was
negligible. The only largely "uncontrolled" flows were NRI deposits,
which waxed and waned according to macro-economic conditions.
The exchange rate was also controlled: it was linked to a basket of
currencies and moved as a crawling peg. Consequently, monetary
policy management, such as it was, did not pose serious problems,
particularly since most interest rates were fixed administratively.

It is only after substantial opening of the economy, and

deregulation of interest rates that price discovery of the rate of interest
has become important. Consequently the Reserve Bank has had to
experiment on a continuous basis. It has had to operate simultaneously
on the external account in the foreign exchange market to contain
volatility in the exchange rate, and in the domestic market to contain
volatility in interest rates. Since both the exchange rate and interest
rate are the key prices reflecting the cost of money, it is particularly
important for the efficient functioning of the economy that they be
market determined and be easily observed. Excessive fluctuation and
volatility masks the underlying value and gives rise to confusing
signals. The task of liquidity management then is to provide a
framework for the facilitation of forex and money market transactions
that result in price discovery sans excessive volatility.
Capital Flows in India
The far reaching economic reforms in India in the 1990s,
witnessed a sharp increase in capital inflows as a result of capital
account liberalisation in India and a gradual decrease in home bias in
asset allocation in advanced economies. During 1990-91, it was clear
that the country was heading for a balance of payment crisis caused by
increased absorption due to deficit financed fiscal expansion of the
1980s and the trigger of oil price spike caused by the Gulf War. As
foreign exchange reserves dwindled to less than a months import
financing requirements in 1991, global capital taps got switched off
and the country faced a real possibility of a first ever sovereign
default. Crisis managers got active and averted the default, leaving the
country still with a default-free history. The survival stimuli it kindled,
unleashed massive economic reforms. The reform story has been told
several times in many different fora and I do not intend to repeat it
Foreign investment flows, mainly in the form of foreign direct
investments, averaged US$118 million during 1990-91 and 1991-92.
A significant change in our capital account took place when portfolio

investments by foreign institutional investors were permitted in 1992.

With the exception of 1998-99 when, in the aftermath of contagion
from East Asian financial crisis, portfolio flows turned negative, total
foreign investment in the form of direct and portfolio investment was
US$ 4-8 billion a year till 2002-03. Excluding 1998-99, it has
averaged nearly US$ 5.8 billion over a 9-year period starting 1993-94.
There was another quantum leap in the following two years 2003-04
and 2004-05 with direct investment averaging US$ 5.1 billion and
portfolio investment averaging US$ 10.1 billion, taking total foreign
investment exceeding US$ 15 billion. As it happened, this increase in
capital flows coincided with a slowdown in the economy, particularly
the industrial economy after 1997-98, and instead of current account
deficits we had current account surpluses. Consequently, even
ignoring the non-resident deposit flows, equity investment flows in
themselves posed a considerable challenge for monetary management.
While the year to year foreign investment flows provide some
idea of the magnitude of the capital flows that may be required to be
sterilised, the month-to-month or intra-month variations in these flows
provide a better idea of the volatility of these flows with which central
bank liquidity management has to cope and these variations have been
sizeable. They have been dominated by portfolio flows. While these
flows appeared to be mean reverting till October 2002, there appears
to have been a strong trend with wider oscillations subsequently. This
means that the monetary authorities now have to cope with larger and
more volatile capital flows than it had been faced with in about a
decade from the onset of reforms.
Faced with these large capital flows, there has been a steep
accretion to foreign exchange reserves starting October 2000. Over
US$ 100 billion have been added in foreign exchange reserves since
then, taking them from US$ 34.9 billion to US$ 143.6 billion in
October 2005. IMD redemptions saw the reserves temporarily
dropping to US$ 135 billion at end-December 2005 but the reserves
are back at US$ 146.2 billion by March 17, 2006 (Chart 1). The
reserve accretion of this large magnitude has been largely the result of
massive capital flows. The capital flows are adding to absorption

directly as well as indirectly through increased domestic credit growth

and have resulted in a steep rise in trade deficit and, till at least
recently, substantial excess liquidity in the economy. The problem of
scarcity of 1991 is now seen as a problem of plenty by many.
Chart-1: Forex Reserves
USD billion



In these circumstances, the problem for monetary management

was two-fold. First, it had to distinguish implicitly between durable
flows and transient flows. If capital flows are deemed to be durable
and indefinite, questions arise regarding foreign exchange
management. If the flows are deemed to be semi-durable, essentially
reflecting the business cycle, the task of monetary and liquidity
management is to smoothen out their impact on the domestic
economy, finding means to absorb liquidity in times of surplus and to
inject it in times of deficit. Second, in the short term, daily, weekly or
monthly volatility in flows needs to be smoothened to minimise the
effect on domestic overnight interest rates. In practice, ex-ante, it is
difficult to distinguish what is durable, what is semi-durable and what
is transient. Hence policy and practice effectively operates in an
environment of uncertainty and a variety of instruments have to be
used to manage liquidity in this fluid scenario.

Liquidity Management through Indirect Instruments: Early

Before the advent of repos, market operations by the RBI
almost invariably focused on open market operations through outright
transactions in government securities. The scope of open market
operations in the earlier period was limited as yields were repressed
by an administered interest rate regime, including auctions of T-bills
on tap at fixed coupon of 4.6 per cent. The move towards a market
determined system of interest rates began by development of the
secondary market by increasing coupons and decreasing maturity of
government debt1. The yields were made substantially market
determined by introduction of auctions since the mid-1980s 2. The
Reserve Bank introduced reverse repos for absorption from December
19923. With the objective of improving short-term management of
liquidity in the system and to smoothen out interest rates in the
call/notice money market, the Reserve Bank began absorbing excess
liquidity through auctions of reverse repos (then called repos). The
development of repos into a full fledged monetary instrument in the
form of LAF has been a fascinating case study of what it takes to
undertake changes in operating framework. The chronology of these
developments is provided in Box-I. Till 2003-04, market operations
were primarily conducted in the form of outright sales and purchases
of government securities (Chart-2). Since then, LAF volumes have
increased considerable (Chart-3). The important contribution of LAF
has been in keeping overnight interest rates by and large range bound.
With the activation of bank rate as a policy instrument, reverse repos
helped in creating an informal corridor in the money market, with the
reverse repo rate as floor and the Bank Rate as the ceiling. The use of
these two instruments enabled RBI to keep the call rate by and large
within this informal corridor.

Chart-2: Net purchase (+)/ net sale (-)

[ Dated securities ]

Rs. Crore



Chart-3: Ne t injection (+)/absorption(-) of liquidity through LAF

Rs . crore

Although repo auctions were conducted at variable rates when LAF

was introduced, with a view to providing quick interest rate signals,
RBI did have the additional option to switch over to fixed rate repos
on overnight basis, in order to meet unexpected domestic or external

developments. LAF was introduced on the basis of uniform price

auctions, but the auction system was switched to multiple price
auctions from May 5, 2001 (Box - I).

Box-I: Liquidity Adjustment Facility

The choice of operating framework and operating procedures in
any economy is always a difficult one and depends on the stage of
macro-economic and financial sector development and is somewhat of
an evolutionary process. As part of the financial sector reforms
launched in mid-1991, India began to move away from direct
instruments of monetary control to indirect ones. The transition of this
kind involves considerable efforts to develop markets, institutions and
practices. In order to facilitate such transition, India developed a
Liquidity Adjustment Facility (LAF) in phases considering countryspecific features of the Indian financial system. LAF is based on
repo / reverse repo operations by the central bank.
In 1998 the Committee on Banking Sector Reforms
(Narasimham Committee II) recommended the introduction of a
Liquidity Adjustment Facility (LAF) under which the Reserve Bank
would conduct auctions periodically, if not necessarily daily. The
Reserve Bank could reset its Repo and Reverse Repo rates which

would in a sense provide a reasonable corridor for the call money

market. In pursuance of these recommendations, a major change in
the operating procedure became possible in April 1999 through the
introduction of an Interim Liquidity Adjustment Facility (ILAF) under
which repos and reverse repos were formalised. With the introduction
of ILAF, the general refinance facility was withdrawn and replaced by
a collateralised lending facility (CLF) up to 0.25 per cent of the
fortnightly average outstanding of aggregate deposits in 1997-98 for
two weeks at the Bank Rate. Additional collateralised lending facility
(ACLF) for an equivalent amount of CLF was made available at the
Bank Rate plus 2 per cent. CLF and ACLF availed for periods beyond
two weeks were subjected to a penal rate of 2 per cent for an
additional two week period. Export Credit refinance for scheduled
commercial banks was retained and continued to be provided at the
bank rate. Liquidity support to PDs against collateral of government
securities at the bank rate was also provided for. ILAF was expected
to promote stability of money market and ensure that the interest rates
move within a reasonable range.
The transition from ILAF to a full-fledged LAF began in June
2000 and was undertaken in three stages. In the first stage, beginning
June 5, 2000, LAF was formally introduced and the Additional CLF
and level II support to PDs was replaced by variable rate repo auctions
with same day settlement. In the second stage, beginning May 2001
CLF and level I liquidity support for banks and PDs was also replaced
by variable rate repo auctions. Some minimum liquidity support to
PDs was continued but at interest rate linked to variable rate in the
daily repos auctions as determined by RBI from time to time. In April
2003, the multiplicity of rates at which liquidity was being
absorbed/injected under back-stop facility was rationalised and the
back-stop interest rate was fixed at the reverse repo cut-off rate at the
regular LAF auctions on that day. In case of no reverse repo in the
LAF auctions, back-stop rate was fixed at 2.0 percentage point above
the repo cut-off rate. It was also announced that on days when no
repo/reverse repo bids are received/accepted, back-stop rate would be
decided by the Reserve Bank on an ad-hoc basis. A revised LAF

scheme was operationalised effective March 29, 2004 under which the
reverse repo rate was reduced to 6.0 per cent and aligned with bank
rate. Normal facility and backstop facility was merged into a single
facility and made available at a single rate. The third stage of fullfledged LAF had begun with the full computerisation of Public Debt
Office (PDO) and introduction of RTGS marked a big step forward in
this phase. Repo operations today are mainly through electronic
transfers. Fixed rate auctions have been reintroduced since April 2004.
The possibility of operating LAF at different times of the same day is
now close to getting materialised. In that sense we have very nearly
completed the transition to operating a full-fledged LAF.
With the introduction of Second LAF (SLAF) from November
28, 2005 market participants now have a second window to fine-tune
the management of liquidity. In past, LAF operations were conducted
in the forenoon between 9.30 a.m. and 10.30 a.m. SLAF is conducted
by receiving bids between 3.00 p.m. and 3.45 p.m. The salient features
of SLAF are the same as those of LAF and the settlement for both is
conducted separately and on gross basis.
The introduction of LAF has been a process and the Indian
experience shows that phased rather than a big bang approach is
required for reforms in the financial sector and in monetary

The introduction of LAF had several advantages.

First and foremost, it helped the transition from direct
instruments of monetary control to indirect and, in the process,
certain dead weight loss for the system was saved.
Second, it has provided monetary authorities with greater
flexibility in determining both the quantum of adjustment as

well as the rates by responding to the needs of the system on a

daily basis.
Third, it enabled the Reserve Bank to modulate the supply of
funds on a daily basis to meet day-to-day liquidity mismatches.
Fourth, it enabled the central bank to affect demand for funds
through policy rate changes.
Fifth and most important, it helped stabilise short-term money
market rates.
The call rate has been largely within a corridor set by the repo
and reverse repo rates, imparting greater stability in the financial
markets. As has been mentioned, the emergence of corridor was
gradual. The transition is not a menu choice as is sometimes viewed
in text books.
LAF has now emerged as the principal operating instrument of
monetary policy. Although there is no formal targeting of overnight
interest rates, the LAF is designed to nudge overnight interest rates
within a specified corridor, the difference between the fixed repo and
reverse repo rates, currently 100 basic points. The LAF has enabled
the Reserve Bank to de-emphasise targeting of bank reserves and
focus increasingly on interest rates. This has helped in reducing the
CRR without loss of monetary control.

Liquidity Management in the More Recent Period

Let me now focus on our experience in liquidity management in
recent years. After the introduction of the second stage of LAF in May
2001, liquidity has generally been in surplus mode with the increase in
levels of capital flows and in the presence of a current account surplus
until 2003-04. With the continuing accretion to foreign exchange
reserves, there was corresponding injection of liquidity that had to be
strerilised. At the same time, the reverse repo policy interest rate was
reduced in successive steps from 6 per cent in March 2002 to 4.5 per
cent by August 2003 before raising it to 5.50 per cent by January 2006
in four increases of 25 basis points each. Thus, the aim of monetary
policy was to keep overnight call money market rates in the system
within the informal interest rate corridor.
On the whole, LAF has had a pronounced favourable impact of
lowering volatility of short-term money market rates. Monthly
average call rates, which were volatile in a 5-35 per cent band during
1990-98, have clearly stabilised subsequently and have generally
ranged between 5-10 percent (Chart 4). Call rates have become

largely bounded by the informal interest rate corridor after the

introduction of LAF (Chart 5). The corridor between repo and reverse
repo rates which was set at 200 basis points initially and was widened
to 250 basis points in August 2003 was lowered to 150 basis points in
March 2004, to 125 basis points in October 2004 and further to 100
basis points in April 2005. The call rates have remained anchored
around the lower corridor since June 2002, except for a brief period
during February-April 2003 and between October 2004 and January
2005. Again since October 2005, the system appears to have clearly
moved from enduring surplus to marginal deficits.
Chart-4: Call Money Rates
Per cent


Chart-5: Movement of Call Money Rate and LAF Corridor



Call Money

Per cent

Reverse Repo





Monetary management since mid-2002 has clearly focused on

managing surplus liquidity. This was accomplished by the
simultaneous operation of the LAF and open market operations.
Given that RBI had a finite stock of government securities its
ability to mop up large capital inflows indefinitely was therefore
limited, and LAF operations began to bear the burden of stabilisation
disproportionately. Moreover, the LAF is essentially designed to take
care of fictional liquidity on a day-to-day basis, hence its function was
itself beginning to get distorted by such a sterilisation.

Lessons from the Indian Experience & Coping Ahead

What has been the lesson from the Indian experience of coping
with liquidity management under large and volatile capital flows?
First, by putting reforms on a more stable footing by adopting
gradualism but avoiding reversals, it has been able to sustain capital
inflows on a more stable basis with lower volatility than has been seen
in some other emerging markets. This has helped central banks in
smoothening out interest rates under cyclical transition.
Second, in cases where money and debt markets have depth,
development of open market operations through repo operations is
particularly important for building up microeconomic capacities for
macroeconomic objective of liquidity management. In India, the
emergence of LAF was a single biggest factor which helped to
manage liquidity amidst large and volatile capital flows and to keep
short-term interest rates stable in this environment. It widened the
range of instruments for monetary policy and enabled the Reserve
Bank to operate on shorter range of interest rates. Restricting the
maturities of interest rates at which central bank operates to a smaller
range at the short-end has reinforced market functioning.
Third, in the face of constraints on sterilisation arising from
paucity of instruments, the monetary authorities in India adopted a
careful strategy which preserved the strength of the central bank
balance sheet and the credibility of the central bank, while causing
minimal frictions in the debt markets. MSS was not contemplated of

initially even while capital flows had distinctly increased since 199394. However, in face of large surplus liquidity since 2000, MSS was
evolved as a very useful instrument of monetary policy to sustain
open market operations. MSS has marginal costs, but it has helped the
monetary authorities manage business and liquidity cycles through the
surpluses and the deficits. With MSS, the monetary authorities now
have the option of assigning LAF for day-to-day liquidity
management, using MSS for addressing semi-durable liquidity
mismatches, while using outright sales/purchases of dated securities
for truly long-term liquidity surpluses or deficits. The MSS experience
tells us that operating framework and procedures undergo changes and
one need to keep innovating to calibrate market operations to the
evolving liquidity conditions.
Fourth, by focusing on the microstructure of the markets and by
facilitating development of a wider range of instruments such as
Collateralised Borrowing and Lending Obligation (CBLO) 4, market
repo, interest rate swaps, Certificates of Deposit (CDs) and
Commercial Papers (CPs), in a manner that avoided market
segmentation while meeting demand for various products, liquidity
management could be placed on a much firmer footing. Market and
central bank practices evolved to institutional developments.
However, the payment and settlement system proved to be the most
difficult area, but one which delivered the enabling environment for
micro and macro developments supportive of the liquidity
management procedures now in place. The focus on micro-aspects
reinforced the central bank's ability to signal and transmit policy
Fifth, with efforts to build up indirect instruments for liquidity
management, the transmission of monetary policy has improved. The
link between overnight interest rates and yields on T-bills and liquid
dated securities has become far stronger. While the lending rates and
even more so deposit rates have been taking considerable time to
adjust, the strength of the transmission has been in evidence in recent
periods. It is important to note that in a situation of large surplus

liquidity, the transmission is understandably weaker. However, in the

more recent period as considerable amount of excess liquidity was
mopped up by the central bank, the rate signal efficacy has gone up
Sixth, monetary policy setting through signalling improves, as the
central bank's liquidity management is able to establish its control
over short-term interest rate by reducing volatility in these rates. By
removing working balance constraints for the banks, it can influence
the term structure of interest rates as reflected in money market rates
of various maturities and the sovereign yield curve.
Lastly, while temporary mismatches in liquidity conditions do
pose a problem for maintaining immediate goals of monetary
operations, the overall objective of liquidity management needs to
accorded primacy. In India, in spite of difficulties posed by sudden
transitions in liquidity conditions, macroeconomic success of overall
policies are reflected in delivering low inflation, which at 4.7 per cent,
has averaged below 5.0 per cent over last five years in terms of the
headline rate. Consumer price inflation has averaged still lower at
around 4.0 per cent on a point-to-point basis and 3.9 per cent on an
average basis.
In spite of the relative success in liquidity management in India,
several challenges remain ahead.
First, notwithstanding the large size of the debt markets,
absence of a vibrant term market, the illiquidity of a large set of
securities and limitations of corporate debt market continue to come in
way of further contemplated changes.
Second, while the Reserve Bank now enables market
participants to meet their marginal liquidity demand twice a day on
each working day, there is a moral hazard that passive operations by
central bank in the market may be resulting in some market players
not doing enough for their own liquidity management.
Third, as the system moves to maintenance of SLR securities at
statutory minimum levels, liquidity provision would become more

difficult unless the instrument set is widened to facilitate market

players to even out their liquidity mismatches.
Fourth, as RBI withdraws from the primary market in
accordance with the FRBM Act, 2003, there is an urgent need to
bridge the institutional gap with minimal necessary changes so that
market operations retain their efficiency, both from the view point of
central bank and the market participants.
Finally, further improvements in liquidity management would
substantially depend on our abilities to improve forecasting of
liquidity in the system. The short span within which liquidity
conditions have been changing by a large amount has been the biggest
constraint in targeting short-term interest rates. More effort for
understanding the fiscal position and the government cash balances, as
also the timing of foreign capital flows are of paramount importance
in this context.

Liquidity Management in Banks becoming more

With the splurge in the credit off-take in the recent past, banks have
had to increase their reliance on bulk funding sources. At the same
time many of them have also been paring their excess Statutory
Liquidity Ratio (SLR) portfolio to fund the credit growth. While this
strategy helped them till the recent past, it is unlikely to help them in
future given the fact that most of the banks SLR portfolio are just
about adequate to meet the statutory requirements, hence leading to a
scramble to garner bulk deposits.
Though it is a known phenomenon that banks borrow short-term and
lend long-term, the asset liability mismatch has increased in the last 12 years with the increasing thrust on expanding their asset base. The
mismatch is accentuated with the increasing preference of the
corporate and high net worth depositors to invest in banks only for
short-terms or through more tax efficient fixed maturity plans (debt
schemes) floated by various mutual funds. Consequently banks in the
recent past have had to increase reliance on the short-term sources of
deposits. Though the banks have begun marketing the long-dated
fixed deposits to retail investors by enticing the depositors with tax
benefits and higher interest rates, ICRA does not expect a significant
shift in the asset liability mismatch (ALM) profile of the banks at least
over the short term. In addition, Reserve Bank of Indias (RBI)
immediate objective to curb the rising inflation numbers is likely to
keep a tight liquidity profile over the short term. As a result, banks
will have to find alternate sources of funds or may have to curtail their
credit growth rates till such times the liquidity profile improves.

ICRA expects the liquidity pressures in the banking system to

continue for some more time. It is important to note that while banks
are taking steps to improve the low cost deposit base, it is a time
consuming exercise. Consequently, the banks will have to find
alternate sources of funds or may have to curtail their credit growth
rates till such times the liquidity profile improves. We also find that
unlike in the past, wherein no bank considered slowing business
volumes, some of them have in fact in the current scenario, started
deliberating on the necessity of curbing business growth for the next
3-4 months. However whether they actually take that step remains to
be seen.

Liquidity risks are endemic to banking given the maturity
transformation they undertake. First line of defence should be
appropriate liquidity policy on asset and liability side, supported by
adequate capital and firm supervision. Despite these, solvent banks
can face liquidity difficulties at times of stress necessitating liquidity


Monetary Policy and Operations in Countries with Surplus

Liquidity, Economic and Political Weekly.
Obstfeld.M, Shambaugh, J.C. and A.M. Taylor "The
Trilemma in History: Tradeoffs Among Exchange Rates,
Monetary Policies and Capital Mobility.
The Implementation of Monetary Policy in Industrial
Countries, BIS
Economic Papers No.
47, Bank of International Settlements.
"Central Bank Liquidity Management:
Practice", April, European Central Bank.



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