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The article brings good clarity about the liquidity surplus and action initiated by RBI. The challenges of surplus due to demonetization and the near term impact on the various financial instruments. The RBI is fine tuning the variable rate repo and reverse repo auction. Despite taking action the liquidity will remain surplus in the year 2017-18. The overarching goals of RBI to absorb post demonetization the surplus liquidity by increasing CRR and NDTL of banks. The downside risk of reducing surplus liquidity management announced in april policy like magnitude of fueling fiscal deficit and revenue deficit which may derail the plan to keep fiscal deficit under check as per the set goals.Since there is no budgeted provision for the absorption of surplus it depicts the lack of coordination between RBI and Government policy. How reverse repo will share the major burden of absorbing surplus liquidity. The increase outgo of interest (net) of RBI will have less profit to share with government and it can null the course correction through reverse repo. There should be regular meeting with RBI and GOI to resolve the lacuna and work out an amicable solution. Our development plan and fiscal deficit target should not be derail otherwise it can have detrimental effect on the over rating of India.

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