The upcoming RBI policy presents a complex balancing act, as the central bank navigates the challenge of imported inflation feeding into domestic price pressures. The RBI is expected to actively manage liquidity conditions through instruments such as Variable Rate Repo (VRR) and Variable Rate Reverse Repo (VRRR) operations, with the objective of maintaining liquidity in a broadly neutral zone, as opposed to a sustained deficit.
On the borrowing front, the RBI has already taken steps to rebalance the government’s borrowing profile, including a reduction in the H1 borrowing share and a lower allocation toward long-duration securities, aimed at easing pressure on the long end of the yield curve.
Additionally, regulatory measures such as adjustments to net open position (NOP) limits signalling proactive approach to curbing speculative activity in currency markets.
Going ahead, the RBI is likely to closely monitor government actions, particularly around fertiliser supply, which could have implications for the kharif crop cycle. Any disruption here may lead to an uptick in food inflation, a key factor that could tilt the policy stance toward a more hawkish tone in June policy.
