Page 38 - Banking Finance October 2024

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2022 and July 2022 respectively. Inflation got spooked still lot of uncertainty about the path that the data
on account of rise in geopolitical tensions post outbreak dependent Central banks are likely to follow to decide
of Ukraine-Russia War. This resulted in sharp rise in the the timing and quantum of future rate cuts.
global prices of crude, food and other important
commodities coupled with further deterioration in the Impact of Monetary Policy Tightening on
supply chain. As a result of this globally inflation spiked various economic variables:
and stood elevated. The central banks across the world
a) On System Liquidity
addressed the situation with aggressive and simultaneous
MPC in the current regime of policy tightening has
monetary policy and quantitative tightening.
changed its stance to withdrawal of accommodation from
ultra-accommodative. The Central Bank indicated that it
India also witnessed rising trend in inflation from October
would pull-out system liquidity in a calibrated and smooth
2021 and become resolute after it went above 6% from
manner. There was gradual decline in liquidity surplus
January 2022 and continued to stay at those levels for
generated during Covid because of monetary easing. It
next 5 consecutive quarters. The situation in India
started declining from the level of Rs. 6.6 trillion in
deteriorated further on account of Russian-Ukraine war
April 2022 to Rs. 1.50 trillion in by April 2023. The
as food and fuel inflation spiked resulting in rise in CPI
banking system liquidity turned into deficit position from
inflation as they carried a joint weight of 52.60% in the
September 2023. This warranted RBI to inject net
CPI basket. This forced the Monetary policy Committee
liquidity on short term. It was clear that RBI's intention
(MPC) to follow other Central Banks with its first-rate hike
by means of its liquidity management was in sync with
in an off-cycle meeting in May 2022. This was followed
its stance and effective policy rates. This supplemented
by consecutive rate hikes with repo rate increasing
and enabled decline in inflation on account of faster
cumulatively by 250 bps in the next 6 consecutive policy
transmission of monetary policy. Figure 1 shows the
meetings, from May 2022 to February 2023. The MPC
movement in system liquidity during FY24.
has maintained status-quo in last
seven policy meetings till April
2024.

Inflation moderation has taken
place both globally and
domestically from its peak in
2022. However, it remains slightly
higher and above the target set by
various central banks. In
March,2023 the financial markets
in US were jolted with banking
failures and the fear of financial
contagion. So, to control the
situation central banks started
adopting a less aggressive policy path, which comprised
(Figure 1: Source Bloomberg)
of pausing rates and possibility of rate cuts in case
inflationary pressure eases further in near term. The
b) On Money Market: Impact on Yield Curves
expectation of rate cuts coupled with the idea that the
global economy would not be entering recession, boosted of T-Bill & CD
the financial market across the globe. However, there is The impact of monetary policy tightening was witnessed

34 | 2024 | OCTOBER | BANKING FINANCE