Our policy is to supply plentiful liquidity: RBI Governor

After the meeting of the RBI board in Kolkata, Rajan told a press conference: "Our policy on liquidity has been to supply the market with plentiful liquidity. We continue to make judgements about how much we need to supply short term liquidity, medium term liquidity as well as long term liquidity."

"As and when we get the sense that more long term liquidity is needed, appropriately we will perhaps do an open market purchase of securities," he said.

Rajan said, "All instruments are available to us and we continue to keep the market plentifully supplied with appropriate amount of liquidity."

On the strategic debt restructuring (SDR) policy, which helps the banks to cope with bad debt burden but could be misused as a tool, the RBI Governor said the central bank will look into how the banks are using SDR to deal with stressed assets.

"Now we are looking how those powers [given to bank by RBI] are implemented. We will obviously have a dialogue with banks. We want to have a framework on how we restore health of banks over a period of time," he said.

RBI introduced SDR to help banks tackle the issue of  bad debts, by allowing banks to acquire control of a defaulting company and converting loans into equity even as India's banks grapple with more than $110 billion of corporate stressed debt.

"The idea is we want to have a framework of how we restore health to the banking system's assets in an effective way over a defined period of time."

He said he hoped that by March 2017 the entire process  of restoring health of banks will be complete.

"As we learn about the way they have been used [SDR], we will obviously have dialogue with the bank's. That dialogue is ongoing," he said.

Rajan said the central bank also expected not more than a 25 basis points hike in U.S. interest rates on a question on the U.S. Federal Reserve meeting next week.

(Reporting by Sujoy Dhar)