Just months ago, India’s central bank pulled out all the stops to draw in dollars to bolster its foreign-exchange reserves and defend the rupee. The stronger-than-expected deluge of cash is now adding to the case for a more hawkish monetary policy stance.
The record $133 billion inflow from the Indian diaspora left banks awash with cash and pushed overnight rates below the Reserve Bank’s 5.25% policy rate, effectively making borrowing cheaper than policymakers intend.
Also Read: RBI may face two hikes, one dilemma as repo rate is seen hitting 5.75% soon
Keen to prevent the excess liquidity from adding to price pressures, the RBI has already drained more than 1 trillion rupees ($10.4 billion) through bond sales and other measures. Market participants expect it to announce further action in coming days.
At the same time, calls for an interest-rate hike next week are getting louder as rising food costs and elevated oil prices add to inflation pressures.
The prospect of a more hawkish RBI, alongside rising global bond yields, has driven Indian yields sharply higher and unsettled investors.
