Excess Liquidity Post Demonentisation: How RBI Is Handling It?

The demonetization move which resulted in the scrapping of high value notes of Rs. 1000 and Rs. 500 from the system to curb malpractices of illicit financing, money laundering, tax evasion etc has flooded the banking system with huge cash reserves.

To tackle the situation, the apex bank has come in and is acting as a dam to prevent any unbalanced liquidity state to harm the system. To add to the situation is the unprecedented dollar flow which too cannot be ignored as then the forex market go in a tizzy. The dollars have made their flow both in the equity and debt markets to the tune of $9 billion and $18 billion respectively from the beginning of this year.

And for each dollar that the central government buys, to keep the currency in check and maintain the balance rupee infusion has to be done. The move is being deferred for long to counteract the already cash reserve with the government on account of demonetisation. Additionally, in respect of the currency forward contracts which is a commitment or contract to fulfill obligation to purchase dollars at a future date, in the last six months post demonetisation, the levels of greenback with the Indian government has reached the highest in three years time in net position.

So, mainly the apex bank is confronting the issue of high cash, on the ground, by deferring cash infusion via forex operations. Also for the first time in the history of RBI, it has put its net forwards contract in the maturity span of 3-12 months time such that when these contracts get matured, there is substantial reduction in the excess liquidity in the system.

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