3 min read.Updated: 26 Sep 2022, 08:42 PM ISTRupa Rege Nitsure
The MPC will have to focus on matters more than inflation management at its coming meet
Of late, Indian fixed income markets are witnessing heightened nervousness due to many factors. Retail inflation quickened to 7% in August after easing for three straight months until July. The banking system’s liquidity slipped into deficit after 40 months on 21 September, led by advance tax outflows for the second quarter and payments for government bonds. On the same day, the US Federal Reserve raised rates by 75 basis points, as expected, and flagged more hikes in future. In response to the Fed’s third aggressive move, countries such as the UK, Switzerland, Norway, Indonesia, the Philippines, and Hong Kong raised rates as the dollar surged. Rupee-dollar rate posted a sharp depreciation of 1.3% in just two days (21-23 September) amid a lack of significant dollar sales by the Reserve Bank of India. One of the reasons why RBI did not intervene in the forex market could be inadequate liquidity in the banking system. RBI’s foreign exchange reserves have fallen from almost $642 billion to $546 billion. Between 21 and 23 September, the yield on India’s 10-year benchmark paper (7.26%, 2032) rose by 13 bps to 7.39%. Borrowing costs in the short-term debt market have surged to the highest level in more than 38 months. Large weekly borrowings by the government and continued pick-up in bank credit are weighing on liquidity.