Surplus liquidity, as measured by the quantum of extra funds that banks park at the Reserve Bank of India’s (RBI) absorption window, averaged `2.48 lakh crore a day in August, the highest since June 2022.
Hefty government expenditure in the first half of a poll-studded fiscal year, the RBI’s interventions in the foreign exchange market amidst strong overseas inflows in Indian equities and a greater-than-expected quantum of `2,000 notes in the banking system have helped drive liquidity.
With hardening food prices likely to push headline retail inflation above the RBI’s tolerance band of 2-6% in July, questions have arisen about the impact of surplus liquidity on price pressures, even if optical. Theoretically, large surplus liquidity in the banking system can translate into higher asset prices and thus pose upside inflation risks. The RBI will detail its next monetary policy statement on Thursday. “While we expect the RBI to continue with the ‘withdrawal of accommodation’ stance, this liquidity deluge could still ring in some caution as it could impede its so-called inflation mandate,” Madhavi Arora, economist at Emka