RBI's liquidity infusion only relieves a symptom

To address liquidity tightness in the banking system, we need a proper diagnosis followed by remedial action. A temporary balm may just be glossing over a deep structural problem

- 

Banking," says Section 5(b) of the Banking Regulation Act of 1949, is "accepting for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.

In plain language, this means that the lending or investment activity of banks must be based on deposits mobilized from people. But the Reserve Bank of India's (RBI) frequent moves to infuse banks with large quantums of liquidity on a nearly systemic basis seems to fly in the face of that premise. True, all central banks are charged with managing the level of liquidity in an economy such that it is neither too much nor too little, but just sufficient to keep the economy humming, given the expected level of activity. This entails their engaging in what are known as 'open market operations' (OMOs), mainly the buying and selling of securities to infuse and withdraw liquidity respectively, depending on the underlying macroeconomic conditions.