RBI may not have to drain cash further as core liquidity declines
Reserve Bank of India need not have to tighten liquidity any further as a metric cited by the central bank has fallen below levels that could stoke inflation, potentially paving the way for Mint Road to effectively deliver a rate cut by letting market rates ease from their current elevated levels.
As of December 15, core liquidity, which accounts for government cash balances that periodically flow in and out of the banking system, is at around 1.1% of net demand and time liabilities (NDTL) — a broad measure of bank deposits.
In its Report on Currency and Finance for 2021-22 published in April last year, the RBI had said that every percentage point increase in surplus liquidity above 1.5% of NDTL leads to average inflation rising by 60 basis points in a year.
«RBI has talked about 1.5% of NDTL as the threshold for liquidity being classified as inflationary or non-inflationary. As of December 15, we are at 1.1% of NDTL in terms of core liquidity so we are below that threshold,» said Vivek Kumar, economist, Quanteco Research.
«They have not clearly defined whether they are talking about headline liquidity or core liquidity, but my sense is that it pertains more to core liquidity because the headline liquidity is extremely volatile.
