The Reserve Bank of India has said that India's banking system liquidity has slipped into deficit for the first time in nearly 40 months, Reuters reported.
Biggest since May 2019, the central bank infused Rs 218 billion ($2.73 billion) into the banking system on Tuesday. Overnight rates have continued to stay elevated, with the one-day call money rate jumping to 5.85 percent which is the highest since July 2019.
Citing sources, Reuters also reported that India's government is in no hurry to push inflation - which is near to 7 percent and eight-year highs - back to the central bank's 4 percent medium-term target.
The reason behind this move is that aggressive rate hikes could hurt economic growth.
The sources further said that inflation is getting under control now after RBI's rate rises of 140 basis points over the past four months to 5.4 percent and is expected to head back under 6 percent within three to six months.
"We are in no hurry to get inflation to 4 percent. Growth and inflation have to be balanced," said one of the sources.
"New Delhi would be comfortable with inflation coming below 6 percent in the next three to six months," the source added. "Our inflation is under control especially after a series of measures from the government and the RBI." India's finance ministry did not reply.
Established in 2016, RBI's inflation-targeting Monetary Policy Committee (MPC) is mandated to keep inflation within a band extending 2 percentage points either side of its 4 percent target.
Central banks across the countries are also worried about inflation have been raising rates aggressively, with the US Fed widely expected to raise rates by at least 75 basis points on Wednesday.
The Indian government has taken a number of other measures to battle inflation including imposing curbs on rice exports last week after previously restricting exports of wheat and sugar while reducing taxes on gasoline and diesel earlier.
India's April-June economic growth of 13.5 percent was lower than the RBI's forecast of 16.2 percent, threatening the overall growth projection of 7.5 percent for the full year.
Last week, global ratings agency Fitch cut India's FY23 growth forecast to 7 percent from 7.8 percent.
-With inputs from Reuters
Also Read: ADB cuts India's GDP growth forecast to 7% for FY23 on high inflation, monetary tightening
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