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

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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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