India: The liquidity outlook and its implications

- "The Reserve Bank of India (RBI) was one of the earliest central banks to start exiting from its accommodative monetary policy stance – not just in adjusting interest rates, but also in mopping up systemic liquidity. The overall liquidity position – defined as the sum of the liquidity adjustment facility, the market stabilisation scheme and the central government’s surplus at the RBI – has fallen from a peak of INR2.2trn in August 2009 to about INR200bn in July."
- "This tightening in liquidity owes its origin to both the endogenous policy-induced hike in the cash reserve ratio (CRR) as well as exogenous factors, such as one-off telecom payments and a larger-than-normal rise in currency in circulation. With inflation running at double-digits, transaction demand for money has picked up, increasing currency in circulation and adding to systemic liquidity tightness. The timing could hardly be better for the RBI, which is battling high inflation. At its 27 July policy meeting, the RBI officially announced a change in the rate corridor, indirectly targeting the overnight rate at repo rate rather than reserve repo rate - an effective tightening in overnight rates by 150bp, in addition to the 100bp of hikes in the repo rate since March. Short-term rates have risen by 150-230bp since end-May and this rise in the cost of funding should reinforce the monetary policy transmission."

Nomura Asia Economic Weekly 20100813

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