Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
Mr. P Krishnamurthy,
Ex-CGM RBI
25/06/14
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Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
The presentation has extensively drawn
from RBI speeches, papers and data
to ensure clarity and authenticity..
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
The Construct….
The Monetary Policy and Liquidity
Markets and Instruments
The Linkages
RBIs Operations
Certain Issues…
.
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
Mkt
&Instrume
nts
Liquidity
RBI
Operations
MP
.
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
LIQUIDITY
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
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.
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
The autonomous factors that influence
liquidity together with the monetary
authorities action impact the level of
reserves of banks with the Central
Bank.
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
Liquidity for central banks
refers to the
monetary base (currency and
reserves of the banking
system), of which it is the
solitary
supplier.
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
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.
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
Global Liquidity
Official Liquidity
Macroeconomic Liquidity
Market Liquidity
Funding Liquidity/
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Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
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..
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Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
Transmission
Instruments
Operataing Procedures
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Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
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
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
Transmission Process.
.
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
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
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
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
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
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.
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
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
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
Liquidity Linkages
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Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
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
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
Factors impacting liquidity
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Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
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)
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
The autonomous factors of liquidity
.
Deposits
and credi
growtht
Govt
Balances
Financial
Stability
Forex
Flows
Currency
in
circulatio
n
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
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
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
Government’s bulk Receipts.
Capital Flows and RBI
Response
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
Source RBI
.
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
Credit growth leads to
increase in money supply
through money supply
through the money multiplier
process.
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Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
An
increase (decrease) in currency
demand reduces (increases) the
availability of liquidity.
The demand for currency is
influenced by seasonal factors or
exceptional
events .
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Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
Discretionary Drivers of
Liquidity
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Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
The factors ,liquidity and RBI
RBI
Govt
Balances
Deposit
.
s and
credi
growtht
Financial
System
Forex
Flows
Currency
in
circulatio
n
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
RBI AND DISCRETIONARY FLOWS
.AA
LAF
WMA
OMO
RBI
MS
S
CRR/SLR
Fx
iNT
FWD
MSF/
OTH
ERS
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
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
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
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.
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
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
Knowledge Workshop on Liquidity 25th June 2014 Sofitel, BKC Mumbai
Thank You
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