The Telegraph
Since 1st March, 1999
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RBI calls for new sterilisation tools

Mumbai, Dec. 2: An internal group of the Reserve Bank of India (RBI) has called for an addition of new instruments to enhance the ability of sterilisation. The central bank did not rule out the usage of cash reserve ratio as a tool for sterilising surplus liquidity.

The market-based approach (leading to withdrawal or injection of liquidity) aimed at neutralising part or whole of the monetary impact of foreign inflows is termed as sterilisation.

The working group, which submitted its report on instruments of sterilisation today, said while some of the existing instruments can be modified and strengthened within the ambit of the RBI Act, introduction of some new instruments for sterilisation would require an amendment to the act. The group felt that there is a need for strengthening and refining the existing instruments, besides exploring new ones appropriate in the Indian context. However, it said the method followed by some other countries in allowing the central bank to float securities is not desirable in India given its current fiscal situation.

The panel also said it is not desirable to use the liquidity adjustment facility as an instrument of sterilisation on an enduring basis.

“However, for limited periods, it can be used in a flexible manner along with other instruments,” the group added. It said operations under the liquidity adjustment facility require the availability of an adequate stock of government securities with the Reserve Bank.

Moreover, these operations involve costs, which have an impact on the balance sheet of the central bank. “If the liquidity adjustment facility is used as an instrument of sterilisation, it loses its character as a day-to-day liquidity adjustment tool operating at the margin,” it added. On open market operations, which is the main instrument of sterilisation, the group said in view of the finite stock of government securities with the Reserve Bank, such operations for sterilisation cannot continue indefinitely.

Most importantly, the group believed that the “use of cash reserve ratio as an instrument of sterilisation, under extreme conditions of excess liquidity and when other options are exhausted, should not be ruled out altogether by a prudent monetary authority ready to meet all eventualities”.

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