“Managing surplus liquidity requires the central bank to reconcile inflation control with financial-market stability.” Explain the challenges posed by persistent liquidity surplus. Evaluate the suitability of different absorption instruments. Suggest how their deployment may be sequenced.

Q6.  “Managing surplus liquidity requires the central bank to reconcile inflation control with financial-market stability.” Explain the challenges posed by persistent liquidity surplus. Evaluate the suitability of different absorption instruments. Suggest how their deployment may be sequenced. (15 M)