The inflation monster could have a sobering impact on a robust industrial rebound that showed up last week in data that revealed a 17.6 per cent year-on-year manucturing sector growth in April. And that is happening the backdrop of a liquidity crunch as credit money gets sucked out of the banking system.
With the Reserve Bank of India (RBI) committed to keeping prices under check, the news that monthly consolidated wholesale price-based inflation crossed double-digits at 10.6 per cent in May strengthened speculation that a higher interest rate regime could arrive well ahead of the quarterly monetary policy due in July.
Analysts expect a liquidity crunch in the banking system, driven by the flush out of funds ariding from the unexpectedly high bid prices in the recent broadband mobile services auctions that fetched about Rs 106,000 crore. This money will come from banks.
“RBI will have to be very careful in fine tuning the monetary policy at this juncture as the current phase of investments must be maintained. Maintaining adequate liquidity should be seen in the light sucking out of funds due to the 3G auction,” said Amit Mitra, secretary-general of the Federation of Indian Chambers of Commerce and Industry (Ficci).
“We believe RBI is concerned about the tightness of current domestic liquidity,” said Sonal Varma of Nomura Securities.
Companies are also expected to borrow from banks to pay first-quarter advance taxes due on Tuesday. “We continue to be wary of a 0.25 percentage point increase in policy rates before the next policy meeting,” Rahul Bajoria of Barclays Capital said.