The focus of the monetary policy announced in April was liquidity rather than interest rates. The Reserve Bank of India is unlikely to cut rates when it announces its new policy on Tuesday. So financial markets should be looking closely at what Raghuram Rajan says about the amount of money available rather than its price. Is he satisfied with the pace at which bond yields have responded to the new liquidity management framework? And by when does he expect the money market to be in a liquidity-neutral zone?
These comments may not be as headline-grabbing as rate cuts, but they should be taken seriously. The other set of comments will be on the possible impact on the foreign exchange market when the dollar deposits raised in September 2013 to defend the rupee mature after three years. The central bank is sensibly prepared with forward dollar purchases, but volatility may not be completely avoidable.