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Monetary Management and Financial Intermediation 127

money multiplier was 5.5, slightly lower than 5.6 a year earlier. However, adjusted for reverse
repo - analytically akin to banks’ deposits with the central bank – Money Multiplier turned out
to be even lower at 4.8 by end-March 2020. Money multiplier has declined from the recent
peak of 5.8 in October 2018 to 5.5 as on January 1, 2021 (Figure 4). In comparison, during
the same period, money multiplier adjusted for reverse repo has declined sharply from 5.7 to
4.5. This shows that the money supply has responded only partially to reserve money growth,
reflecting that the liquidity transmission in the economy remains impaired. The gap between
money multiplier and adjusted money reflected the large amount of funds parked by banks under
reverse repo window by RBI.

Figure 4: Money Multiplier

Source: RBI
Note: Money multiplier adjusted for repo means that the reserve money includes commercial banks’ reverse
repo deposits with RBI

LIQUIDITY CONDITIONS AND ITS MANAGEMENT

4.9 The systemic liquidity in 2020-21 so far has consistently remained in surplus reflecting
several liquidity enhancing measures undertaken by the Reserve Bank in the wake of
COVID-19 induced disruptions. The main drivers of liquidity during 2020-21 have been
Currency in Circulation (CIC), Government cash balances and the Reserve Bank’s forex
operations. While CIC withdrawals and build-up of Government cash balances resulted in
liquidity drainage from the banking system, the Reserve Bank’s forex operations augmented
systemic liquidity.

4.10 Reserve Bank undertook several conventional and unconventional measures to manage
the liquidity in the economy starting from February 2020. These measures, inter alia, included:

i. Injection of durable liquidity of more than ` 2.7 lakh crore through Open Market
Operation (OMO) purchases between February 6-December 4, 2020.