Persistent monetary tightening risks derailing India’s economic recovery

After a surge in recent weeks, the RBI’s closely watched average call rate rose above its policy rate ceiling of 6.75%. The yield on one-year Treasury bills is higher than 10-year government debt, an anomaly often associated with a volatile bond market.

After a surge in recent weeks, the RBI’s closely watched average call rate rose above its policy rate ceiling of 6.75%. The yield on one-year Treasury bills is higher than 10-year government debt, an anomaly often associated with a volatile bond market.

A financial crisis refers to a strained financial system that is beginning to affect appetite for bonds and further push up funding costs, as the Reserve Bank suspends monetary tightening amid easing price pressures. But economists say the situation could last a while, with the central bank still determined to fight inflation and expected to provide only short-term liquidity relief.

A financial crisis refers to a strained financial system that is beginning to affect appetite for bonds and further push up funding costs, as the Reserve Bank suspends monetary tightening amid easing price pressures. But economists say the situation could last a while, with the central bank still determined to fight inflation and expected to provide only short-term liquidity relief.

„In the context of a rate hike cycle, liquidity management will now be a key focus of monetary policy,” said Gaura Sen Gupta, economist at IDFC First Bank Ltd. Liquidity conditions will remain tight.”

„In the context of a rate hike cycle, liquidity management will now be a key focus of monetary policy,” said Gaura Sen Gupta, economist at IDFC First Bank Ltd. Liquidity conditions will remain tight.”

The benchmark to measure the excess money lenders withhold from the RBI has fallen from 9 trillion rupees to 484 billion rupees ($5.9 billion) in 2022, from 9 trillion rupees in 2022 as the central bank continued to hike rates and tighten liquidity to tackle inflation.

The benchmark to measure the excess money lenders withhold from the RBI has fallen from 9 trillion rupees to 484 billion rupees ($5.9 billion) in 2022, from 9 trillion rupees in 2022 as the central bank continued to hike rates and tighten liquidity to tackle inflation.

Gaurav Kapur, chief economist at IndusInd Bank Ltd, said the recent financial crisis mainly resulted from the RBI’s policy tightening, the government’s cash surplus and uneven liquidity among banks.

Gaurav Kapur, chief economist at IndusInd Bank Ltd, said the recent financial crisis mainly resulted from the RBI’s policy tightening, the government’s cash surplus and uneven liquidity among banks.

The bond market is already feeling the pinch, with the six-month commercial paper of non-banking financial institutions rising 10 basis points this month. According to ICICI Bank, sovereign bond auctions on Friday saw muted demand, with a bid-to-cover ratio of 2.6 times.

The bond market is already feeling the pinch, with the six-month commercial paper of non-banking financial institutions rising 10 basis points this month. According to ICICI Bank, sovereign bond auctions on Friday saw muted demand, with a bid-to-cover ratio of 2.6 times.

According to Soumya Gandhi Ghosh, Chief Economic Adviser, State Bank of India, the increase in the overnight rate reflects the uneven distribution of funds between large and small banks.

According to Soumya Gandhi Ghosh, Chief Economic Adviser, State Bank of India, the increase in the overnight rate reflects the uneven distribution of funds between large and small banks.

If the cash crunch continues to worsen, it could pose risks to an economy that has delivered stellar growth since the pandemic but now faces headwinds from slowing global demand to a heat wave that threatens the country’s thriving agriculture sector.

If the cash crunch continues to worsen, it could pose risks to an economy that has delivered stellar growth since the pandemic but now faces headwinds from slowing global demand to a heat wave that threatens the country’s thriving agriculture sector.

„Higher ratios reflect financial conditions for companies with liquidity and weaker credit profiles,” said Soumyajit Neogi, director of India Ratings and Research Pvt. Inter-linkages can trigger contagion, which affects the larger economy.”

„Higher ratios reflect financial conditions for companies with liquidity and weaker credit profiles,” said Soumyajit Neogi, director of India Ratings and Research Pvt. Inter-linkages can trigger contagion, which affects the larger economy.”

But for now, economists say the Reserve Bank may refrain from using powerful liquidity injection tools to cut rates sharply as it wants to keep borrowing costs relatively high to control inflation and provide a buffer to the local currency.

But for now, economists say the Reserve Bank may refrain from using powerful liquidity injection tools to cut rates sharply as it wants to keep borrowing costs relatively high to control inflation and provide a buffer to the local currency.

The central bank is initially expected to rely on long-term variable bond repurchase agreements and foreign exchange intervention to ease fiscal pressure, IDFC’s Sen Gupta said, adding that the bigger dividend expected by the RBI would help provide more liquidity to the government. .

The central bank is initially expected to rely on long-term variable bond repurchase agreements and foreign exchange intervention to ease fiscal pressure, IDFC’s Sen Gupta said, adding that the bigger dividend expected by the RBI would help provide more liquidity to the government. .

„As far as continuous liquidity injection is concerned, we don’t think the RBI will attempt to do so unless the policy stance moves to neutral,” said A. Prasanna and others wrote in a note. including RBI’s open market bond purchases and reduction in banks’ reserve requirements.

„As far as continuous liquidity injection is concerned, we don’t think the RBI will attempt to do so unless the policy stance moves to neutral,” said A. Prasanna and others wrote in a note. including RBI’s open market bond purchases and reduction in banks’ reserve requirements.