PROBLEM STATEMENT

Mr. X interning at RBI.

RBI operates to control Economy, supply of money, and infuses liquidity into the system.
Liquidity has a bearing on both interest rates and inflation rates. Liquidity management is also
essential so that banks and their borrowers don’t face a cash crunch. In India, liquidity
conditions usually tighten during the second half of the financial year (mid-October onwards).
This happens because the pace of government expenditure usually slows down.
Based on an assessment of prevailing and evolving liquidity conditions and also of the durable
liquidity needs going forward RBI asked Mr.X to suggest a suitable method to avert the
systemic shock and adverse impact on growth. Also find a proactive way to manage liquidity in
the Economy.

METHOD
As main objective of the problem statement is to adjust the rupee liquidity conditions in the
market on a durable basis, Mr. X thinks of using one of the instruments of Monetary policy which
affects overall supply of money/ credit in the economy, the ​OPEN MARKET OPERATIONS​ in
which the RBI buys g-secs if it thinks systemic liquidity needs a boost and offloads them if it
wants to mop up excess money. ​The major advantage of open market operations is that they
inject money directly into the economy (or they extract money directly from it) which will be
suitable for managing the liquidity in the Economy.

THEORY