Inflation stays at 4.27%: What can drain excess liquidity?

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The inflation for week ended July 7 has remained unchanged at 4.27%.

The market had estimated it at 4.32% .

These can be considered as good numbers, especially when you compare them with the kind of shock that one got in the previous WPI number, which came in last Friday. The Wholesale Price Index had risen rather sharply by 5 ticks. But this week we are seeing a much milder jump from 212.5 to 212.6.

Markets normally expect a two-tick jump and in certain monsoon weeks, where there is serious disruption of supplies, especially of primary food articles, like it appeared to have happened last week, there was a big jump in primary article prices. There was no such shock this time.

So, this was an important encouragement to the bond markets. There is one more week to go before you get the credit policy on July 31^st; if it's (inflation) not an unusually high number, then the market will go into the market policy with a confidence that the Reserve Bank will not be unduly tighten in its monetary policy stance or will not be accentuating its policy stance.

It also clears the air for something that comes thereafter. In the month of July, you don't have a very strong base-effect. But come August-September, there is a huge base-effect; prices had shot up in the year-ago period. SO we go into August with a sedate 4.25% kind of figures, then it looks like inflation will quite clearly remain within that 4%-4.5% bracket, for at least until October-November.

Indranil Pan , Kotak Mahindra Bank feels that the inflation is likely to be more range bound at the moment; about 4.25-4.50, for the next month.

He said, "I don't think the RBI is immediately concerned; and the whole issue is that oil prices internationally is staying firm which would lead to some amount of inflationary pressure at a later date."

 

But he opines that some steps must be taken to curb the inflation and the Monetary Policy due to be declared later this month, may take certain steps in this regard.

 

"The first thing, 3000 crore limit on the LAF (Liquidity Adjustment Facility) is likely to be removed. That is definitely likely to happen immediately, so that your corridor actually gets re-established once again. The second thing is that the MSS s ( Market Stabilisation Scheme ) needs to come back again in the market and that should be use as the primary tool for sucking out liquidity from the system. So I think these two things would be implemented in the policy. On the other hand, we are not really looking at any changes in either the repo rate or the reverse repo rate immediately," he added.

 

But he doesn't prescribe the CRR as a tool. He reasoned, "I think the CRR as a tool should be use only when the RBI needs to buy a huge amount of foreign currency at one go, something that happened in February, when they had to buy about 12 billion within a very short period of time. This armory would be kept by the RBI very safe and to be used only at a later date when such an eventuality happens. For a very normal suck out of forex from the market, the amount of infusion of the rupee liquidity that happens should be manageable through the MSS."