- 08 oct - 08 sep - 08 aug - 08 jul - 08 jun - 08 may - 08 apr - 08 mar - 08 feb - 08 jan - 08 4. 0 20. the liquidity injection efforts of the reserve bank, despite being large, could be achieved without compromising either on the eligible counterparties or on the asset quality in the reserve bank ’ s balance sheet. the liquidity requirements of non - bank financial entities were met indirectly by extending liquidity support to the designated counterparties like scheduled commercial banks and primary dealers. liquidity expansion achieved through unwinding of mss and reduction in reserve requirement ensured that the reserve bank ’ s balance sheet did not expand significantly, unlike in several other central banks. how did monetary transmission work? 21. in the wake of the crisis, monetary transmission broke down in several countries as risk aversion gave rise to credit crunch. as regards india, the changes in the reserve bank ’ s policy rates were quickly transmitted to the money and debt markets ( chart 6 ). the money market rates moved in tandem with the policy reverse repo rate. however, transmission to the credit market was slow due to several structural rigidities in the system, especially the dominance of fixed term deposit liabilities in banks ’ balance sheets at fixed interest rates. chart 6 : transmission of policy rates to money and bond markets 12. 0 10. 0 6. 0 4. 0 oct ‐ 09 sep ‐ 09 aug ‐ 09 july ‐ 09 jun ‐ 09 may ‐ 09 apr ‐ 09 mar ‐ 09 feb ‐ 09 jan ‐ 09 dec ‐ 08 nov ‐ 08 oct ‐ 08 sep ‐ 08 apr ‐ 08 may ‐ 08 0. 0 aug ‐ 08 2. 0 jul ‐ 08 yield on aaa corporate bonds yield on 10 ‐ year government securities call rates policy reverse repo rate jun ‐ 08 per cent 8. 0 22. as bank deposits contracted in the past at high rates have started to mature and banks have significantly reduced their term deposit rates, the transmission of lower policy rates to the credit market has improved with a lag ( chart 7 ). chart 7 : deposit and lending rates of public sector banks what are the challenges of exit from monetary easing? 23. there is an active debate on the timing and sequencing of expansionary monetary stance around the world. in this context, governor dr. subbarao, in his j. r. d. tata memorial lecture had indicated that the current monetary and fiscal stance is not the steady state. the exit from the

christian noyer : monetary policy formulation in the euro area speech by mr christian noyer, vice - president of the european central bank, at the " monetary policy and the markets " conference of the national association for business economics, washington, dc, 21 may 2001. * * * introduction ladies and gentlemen, it is a pleasure, and a very great honour, to have been invited to address this special meeting of the national association for business economics and to present the monetary policy of the ecb before this distinguished audience of business economists and policy - makers. the theme of the conference, " monetary policy and the markets " is of the greatest interest – i believe – both to market participants endeavouring to discern and assess central banks'policy directions, and to the ecb, which, since its creation almost three years ago, has been assigning a prominent role to transparency and openness in its policy - making. in my brief remarks today, i will first elaborate on the institutional set - up of the ecb and its objectives. against this background, i will then attempt to explain the ecb's decision - making process as it is structured by our monetary policy strategy. the institutional set - up and the objective of the ecb the body collectively responsible for monetary policy decisions in the euro area is the governing council of the ecb, which consists of the ecb's president and vice - president, the remaining four members of the executive board of the ecb and the governors of the national central banks of those member states that have adopted the euro as their currency. the executive board is responsible for the preparation of the meetings of the governing council and the implementation of the decisions the governing council takes. in particular, the executive board instructs the national central banks on the operations to be completed in accordance with the governing council's directions, making sure that the entire process develops in a consistent and fully harmonised manner. the treaty establishing the european community assigned to the ecb the maintenance of price stability in the euro area as the primary objective and unambiguous mandate. rooted in the long - standing experience of the participating national central banks, there rests the conviction that it is with the credible and lasting maintenance of price stability that the ecb could best enhance the welfare of eu citizens. given the uncertainties surrounding the monetary policy transmission mechanism that arise from the complexity and the continuous evolution of economic behaviour and institutional structures, the ecb is ill - suited to fine - tune economic developments