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Liquidity deluge

LiveMint logoLiveMint 02-04-2017 Livemint

A rate cut in October, a push on the pause button in December and a change in the policy stance to neutral in February—the monetary policy committee of the Reserve Bank of India has managed to take the markets by surprise after its first three meetings. The fault is perhaps more with the market consensus—and journalistic commentary—on each of these occasions.

The committee will meet again this week to decide on monetary policy. Is a fourth surprise in store? It seems unlikely.

The persistence of core inflation as well as the gradual tightening of monetary policy in the US leaves little scope for either an interest rate cut or a shift back to an accommodative stance.

However, there are two related issues that deserve attention: the excess liquidity in the domestic money market as well as rupee appreciation since early January. The central bank has not intervened in the currency market because it will only add to the liquidity management problem.

What the monetary policymakers say about this will be important.

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