ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

Indranil Sen GuptaSubscribe to Indranil Sen Gupta

Financial Sector Reforms and the Balance Sheet of the RBI

The conduct of the Reserve Bank of India?s monetary policy in the 1990s has shaped and in turn, been shaped by the programme of financial sector reforms. The operating procedure of monetary policy had to be comprehensively recast to enable the shift from direct to indirect monetary policy instruments in consonance with the increasing market orientation of the economy. This paper examines the impact of financial sector reforms on the balance sheet of the RBI. In the wake of financial sector reforms, we find that a regime switching has taken place in the RBI?s asset size as well as in the size of its surplus. Moreover, the RBI Balance Sheet has become more transparent in line with international accounting standards.

Liquidity Measures as Monetary Policy Instruments

The Reserve Bank has in the last few years pursued active open market operation as an indirect instrument of monetary policy. The Liquidity Adjustment Facility (LAF) which was introduced on June 5, 2000 is going to play a central role in RBI's liquidity management operations. The concepts of discretionary (DL) and autonomus (AL) liquidity measures make LAF a powerful instrument of monetary policy. The two-way causation between discretionary liquidity and the call money rate, which is a prime representative indicator of availability of liquidity in the system, clearly supports the use of DL and AL in the framework of the multiple indicator approach. Also worth noting in this context is the robust link between AL, DL and the monetary condition index.
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