Stating this in the Report on Currency and Finance 1997-98, the RBI said, "The intra-year shifts in the monetary policy stance reflected the basic challenges of liquidity management faced by the Reserve Bank, both in the context of its medium-term goal and switching over from direct to indirect controls of monetary policy and its immediate concern for ensuring orderly movements of rates in the money market and the foreign exchnage market."

The intra-year movements in the monetised deficit have also emerged as a leading indictor of the liquidity conditions in the money market in 1997-98 as the Reserve Bank simultaneously used repos and 14-day treasury bill auctions as well as reverse repos with primary dealers to provide a stable corridor of interest rates and the exchange rate throughout theyear.

"The thrust to primary liquidity emanated essentially from an enlargement of the monetised deficit till mid-August 1998 and thereafter from the Resurgent India Bond inflows," the RBI report said, referring to the immediate challenge of the rise in monetised deficit in 1998-99.

The report points out that while there was a sharp decline in the Reserve Bank's net foreign assets till August 14, 1998, monetised deficit increased by Rs 11,298 crore driven by the Reserve Bank's substantial support to the central government's programme.

"As a result of renewed exchange rate volatility in early August 1998, the Reserve Bank was forced to resort to a three percentage point hike in the repo rate effective August 21, 1998, and a temporary 1 percentage point hike in reserve requirements effctive August 21, 1998, in order to once again suck out domestic liquidity and prevent spillovers into the foreign exchange market," the report says.

With export credit refinance rates having been reduced to 7 per cent fromAugust 6, 1998, scheduled commercial banks refinance utilisation increased after August 21, 1998, as comparative money market rates ruled higher than such refinance rates.

"However, RIB inflows from August 21, 1998, onwards pushed up the RBI's net foreign assets by Rs 7,186 crore between August 14 and September 25, 1998, with the resultant liquidity renewing market offtake of government paper and thus reducing the monetised deficit by Rs 9,442 crore," the report says.