Keep hungry credit market well-Fed

Ben Bernanke is also known as 'Helicopter Ben' after suggesting that central banks should throw money from helicopters to meet markets' cash needs - an idea originally put forth by Milton Friedman. For him, liquidity took primacy over interest rates. RBI appears to be taking a leaf out of Bernanke's book to calm the money market, which has been thrown into turmoil because of adverse developments in the currency markets. The central bank's action to limit the fall of the rupee by selling the dollar has drained rupee liquidity. If domestic interest rates are to remain stable, the market needs more Indian currency, and that's what RBI is providing.

Under open market operations (OMOs), RBI will buy bonds worth ₹1 tn in two tranches, followed up by a buy/sell USD/INR currency swap worth $10 bn. Although the system liquidity deficit has narrowed to about ₹300 bn from ₹2 tn last month, these measures are being taken with an eye on the weeks ahead when factors like tax payments could reduce money float. This also signals that RBI may not roll over all its short positions in the forward market, reducing uncertainty.

While this may be sufficient to keep money markets in check, Trumponomics can swing markets. RBI must remain watchful. But there's a silver lining: the dollar rally may be running out of steam. Coupled with slowing FPI sales of Indian equities, this may reduce the need for RBI to sell the dollar. Apart from currency intervention necessitating liquidity measures, normal credit growth will need more RBI OMOs. RBI must be open to conducting 3 or 4 times the current injections to keep the credit markets well-oiled.