New Delhi, Sept. 15 -- The Reserve Bank of India's (RBI) operations to mop up a massive liquidity surplus have inadvertently thrust into the spotlight a basic drawback in the inflation targeting regime we adopted in 2016: the disconnect between the rate-setting role of the six-member Monetary Policy Committee (MPC) and its helplessness when it comes to managing liquidity, the flip side of interest rate determination.

Now, RBI is responsible for liquidity levels in the banking system, which must align with what the economy needs to keep its wheels churning. This entails engaging in open market operations (OMOs), mainly buying and selling bonds to infuse and withdraw liquidity respectively, as macro conditions demand.

Also, as the lender ...