Action shifts to surplus liquidity – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/action-shifts-to-surplus-liquidity/articleshow/88172462.cmsSynopsis

The RBI expects growth to be 9.5% this fiscal. It is conservative, given that the import of capital goods has been growing at double-digit rates for months on end and investment has been picking up in the second quarter, suggesting that the momentum could gain pace and not just sustain. Inflationary expectations underpinning the Monetary Policy Statement are, by consensus, less than realistic.

The more things remain the same, the more they change. On the face of it, the Monetary Policy Committee (MPC) of the RBI has maintained the status quo on policy rates and stance. Below the surface, the RBI is preparing to suck out liquidity. This is the right thing to do, given the quantum of surplus liquidity in the system that only serves to lubricate credit flow, without enhancing it, and holds out the potential of fuelling inflation, if such pressures materialise all of a sudden. The RBI has done well to propose discussion papers on the prudential norms for investments and on charges in payment systems. India’s innovation in payment systems is being choked off by poor regulation that denies payment system operators their due.

The RBI expects growth to be 9.5% this fiscal. It is conservative, given that the import of capital goods has been growing at double-digit rates for months on end and investment has been picking up in the second quarter, suggesting that the momentum could gain pace and not just sustain. Inflationary expectations underpinning the Monetary Policy Statement are, by consensus, less than realistic. However, we believe that oil price inflation is likely to moderate, both because of pressure on Opec and Russia to increase production and the prospect of Iran adding to the available pool of hydrocarbons in the near future. The real worry is the fallout of steps by developed market central banks to normalise their monetary policy. While both the US Fed and the European Central Bank are likely to announce a schedule for winding up bond purchases, and stick to it, how this would impact fund flows to and from emerging markets remain uncertain. This is where mopping up surplus liquidity in the system becomes important.

The decision to use fortnightly variable-rate reverse repo auctions as the primary tool of absorbing liquidity allow the market greater weight in determining money market rates, even if the quantum being absorbed is set by the RBI. Ample dollar reserves reinforce India’s ability to manage any turbulence.

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