Liquidity oscillations

This refers to ‘Banks should be ready for higher for longer rates’ (April 24). Short-term oscillations in liquidity of banking system, ‘frictional liquidity’, can well be managed by Reserve

Bank of India using Marginal Standing Facility (MSF) or variable repo rates (VRR) or variable reserve repo rates (VRRR). As banks have Contingency Funding Plan as a fallback mechanism is case of temporary tightening of liquidity, the banking system must have alternative options to RBI interventions. Maintaining a Liquidity Coverage Ratio at such high levels may not do good in the long run .

Forcing higher liquidity holdings at banks with liquidity suppliers that have the ability to overcome frictions in times of crisis may impact the financial system’s ability to deal with liquidity problems.

Kumaramputhur (Kerala)

Cheap money spawned a fiscal madness and cavalier lending, which then led to the NPA crisis. PSBs cumulatively wrote o‹ ₹11 trillion from 2015 to 2023.

The lessons of cyclical depression in world economies are too evident — cheap money, excess credit, excess debt and huge deficits. Universally and across cycles, fiscal discipline has become mandatory and monetary policy would restrain financial markets from irrational exuberance. Every nation and its central bank is now compelled to revive its traditional tight money policy.

The lack of it led to huge debt pile ups, currency devaluation and recession. But then we revert to our merry ways, the moment inflation tends to turn a wee bit benign, which will depend on the duration of ongoing geopolitical predicament.

Navi Mumbai