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`Liquidity management has been a challenging task'

MR CHRISTIAN NOYER (left), Governor of Banque de France, with Dr Rakesh Mohan, Deputy Governor of the Reserve Bank of India, at the International Financial Forum in Mumbai on Wednesday. — Paul Noronha

Mumbai May 16 Overall liquidity management has been a challenge in the past five to six months but the RBI has to deal with it, said Dr Rakesh Mohan, Deputy Governor, Reserve Bank of India.

"Increased volatility in capital flows tending to inject excess liquidity into the system and bunching of tax payments that suck liquidity out of the system, have made the task of liquidity management somewhat more difficult over the past year," he said at a seminar on `European financial markets'.

On the RBI's intervention in the forex market, Dr Mohan said the central bank does intervene in the currency market but the volume of intervention was smaller than the total turnover in the forex market. Exchange rate is market determined, he said.

"The Indian approach to exchange rate management has been to avoid excessive volatility," he added.

According to Dr Mohan, "The recent change in legislation enables the RBI to reduce the statutory liquidity ratio depending on the macro and monetary conditions."

The Government has recently allowed the central bank to lower SLR below 25 per cent.

The RBI was cautious and laid stress on maintaining financial stability in the country, he added.

"In a low-income economy like ours, the cost of downside risk is very high, so the objective of maintaining financial stability has to be constantly kept in view as we develop financial markets," he said.

Money markets

On money markets, Dr Mohan said: "In line with the shifts in policy emphasis, various segments of the money markets have acquired greater depth and liquidity. The price discovery process has also improved."

He added, "The call money market has been transformed into a pure inter-bank market, while other money market instruments such as repo and CBLO have developed to provide avenues to non-banks for managing their short-term liquidity mismatches."

On government securities market, he said there was a need to make the market more liquid and increase the number of players.

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