"In response to external shocks arising from the south-east Asian crisis and in recognition of the interlinkages, a series of monetary policy measures were undertaken impinging on liquidity, foreign exchange and money market rates," the report states.

During the first quarter of 1997-98 (April-June), excess supply conditions existed in the forex market and inter-bank call money rates were low. Liquidity was abundant and the Reserve Bank sold government securities to absorb liquidity through open-market operations.

However, there was a noticeable depreciation of the rupee in the second quarter and in September 1997 there were some sales of foreign currencies by the Reserve Bank. "Reflecting the resultantliquidity drain, the average outstandings stood low and reverse repos outstandings increased sharply," the RBI states.

In January 1998, the foreign exchange market again came under severe pressure necessitating the RBI to undertake strong monetary policy measures leading to a sharp withdrawal of liquidity and increase in the interest rates. As a consequence, the call rates increased sharply and in line with this development, the turnover in the money market showed a further decline. As offsetting measures, foreign currency purchases were undertaken together with reverse repo operations.

"The impact of the monetary management was such that in February orderly conditions were restored in the forex market and liquidity showed improvement," the RBI states.

With markets exhibiting confidence, foreign exchange inflows increased sharply in late February and March 1998, enabling the Reserve Bank to sell large amounts of securities under OMO.

In the first quarter of 1998-99, the rupee again came under severepressure in May and June and foreign currency sales increased significantly. Liquidity conditions, however, ruled easy owing to a sharp increase in monetised deficit with the Reserve Bank accepting devolvement of Rs 13,999.5 crore in respect of government securities and Rs 347.3 crore in the 364-day treasury bills with a view to keeping interest rates at a low level.

Decline in non-food credit also contributed to easy liquidity conditions, which are reflected in higher outstandings amount of repos and higher turnover in call money market and steadily declining call rates moving in tandem with reduction in repo rates.