WHAT – Money floating in the system that is available to all stakeholders of the markets viz.  Individuals, corporate entities and the government.

INFLUENCED BY – demand and supply of money in the system

WHO MANAGES – RBI

HOW RBI MANAGES – Inject liquidity in the system or absorb the liquidity in the system

THREE WAYS THE LIQUIDITY CAN GET AFFECTED.

• Government Borrowings: Government is the biggest borrower in India. It borrows in the form of the securities to fund the deficit that arises when its income falls short of expenses.
• Corporate Borrowings: Increased borrowings by the corporate sector to fund the Capital expenditures and short term credit needs can affect the liquidity of the system.
• RBI Interference: RBI may reduce the availability of the rupee by buying rupee and selling a foreign currency such as the US dollar. This is primarily done to maintain the value of rupee. RBI can withdraw excess liquidity from the financial market also when it sees that assets prices are approaching towards a bubble situation.