Amidst proactive policy support from the central bank, India’s core money market liquidity surplus jumped sharply from Rs 2.6 tn in FY20 to Rs 8.2 tn in FY21, and further towards Rs 8.4 tn in FY22. However, gradual normalization of endogenous factors and the expected BoP swing in FY23 could engender a policy preference for a squeeze in liquidity surplus. With India-US inflation differential currently in favor of India, we expect the RBI to use its policy levers strategically to mop up excess liquidity with reliance on FX channels rather than sale of domestic assets. Meanwhile, the finetuning exercise via curbing of liquidity free-float through VRRR auctions would continue – however, we do not expect an expansion in its scope in FY23 due to anticipation of normalization of monetary policy by the RBI. Overall, we see core liquidity surplus narrowing towards Rs 2.8-3.5 tn (1.6-2.0% of banks’ NDTL) by end of FY23 from Rs 8.4 tn (5.1% of banks’ NDTL) in FY22.
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