Understanding the relationship between liquidity and inflation in the post-crisis period in India: from banks' dealers perspectives

The advent of liquidity as a matter of study and research in India may be traced back to the literature of the pre-crisis period on money supply which, having left its vestige until early 2010, revolved around macro-economic modeling of money, output, and prices with sporadic attention to issues such as endogeneity and multiplier. In 1998, the Third Working Group of the RBI introduced liquidity as measures of money supply. After the RBI's first guideline on asset liability management in 1999, the issue of liquidity started gaining ground in academics and the RBI economists started modeling and forecasting liquidity followed by practitioners and academicians during the pre-crisis period. In the post crisis period, the issue of inflation gained ground. This chapter examines how the dealers in government securities and the dealers in stocks in the front offices of the treasury departments in the banks and financial institutions procure and manage liquidity for investment and other purposes amidst inflation subject to the influences of the drivers of inflation.