An examination of factors affecting liquidity management in Indian financial system

Liquidity management has proved to be difficult in India after financial liberalization in 1991. This paper studies the liquidity management in India from 1998 to 2010 and analyses the determinants of liquidity in India. The focus is on the liquidity in banks and nonbanking financial institutions. The finding indicates that the average increase in liquidity of banks was 2.77% per quarter from 1998 to 2010. The average increase in liquidity in non banking financial institutions from 1998 to 2010 was observed to be 1.13% per quarter. In all cases for banks, periods of liquidity decline were followed by periods of increase in liquidity but it was not the same with nonbanking financial institutions which suffered a cumulative liquidity decline of 27.7% between 2007 and 2010. Nonbanking financial institutions were affected more in terms of liquidity decline during global financial crisis as compared to banks in India. Discount rates and SLR have a negative influence on liquidity for banks while an increase in cash reserve ratio has a positive influence on liquidity of banks. In regard to liquidity in non banking financial institutions it is observed that determining factors are only discount rates and cash reserve ratio.