RBI to face problem of plenty: Prepare for bond sales
Reserve Bank of India's (RBI) challenge for the rest of the year may not be inflation but liquidity. The resumption in government spending likely trimmed borrowing, and a surge in overseas fund flows could complicate the RBI's task of keeping its monetary policies effective.
Liquidity — a tool more effective than policy rates — is likely to surge in the next few months after remaining tight for the past few quarters as the central bank focused on a steady withdrawal, spawning a deficit.
As inflation still remains a threat both in the West and at home, the RBI is unlikely to lower its guard — more so when the economy is firing on all cylinders. Last year it is estimated to have expanded at 8.2%.
But a resumption in government spending after a two-month suspension enforced by the model code of conduct is set to release funds into the system. The RBI's generous payout of ₹2.1 lakh crore could itself become an issue to deal with. Investors estimated that the government's cash balances with the RBI is about ₹3 lakh crore, which could flood the banking system in the next few weeks.
Furthermore, the US dollar inflows from investors who must lap up Indian bonds due to its inclusion in the JPMorgan Emerging Markets Index could leave the system with more rupee funds than ideal to deal with the price pressures at this point.
Investors estimate that nearly $10 billion of the anticipated $25 billion has already flowed in and the rest will come in the weeks ahead. The likelihood of Prime Minister Narendra Modi returning to
