India economy not at stage for pulling back liquidity

Indian economy has not reached the level where the central bank can begin pulling back liquidity as Asia’s third-largest economy is still recovering from the shock of two major waves of coronavirus, Finance Minister Nirmala Sitharaman said recently.

“I am glad that RBI (Reserve Bank of India) understands that quicker retrieval of the liquidity from the economy may not do the necessary things to win,” Sitharaman said in a virtual conference with industries.

“They have not given any indication about wanting to suck out the liquidity that is available there,” she added.She said while India will take measures to contain inflation, growth will be a priority in the current environment.

India’s inflation has been above the RBI’s tolerance band of 6 per cent for the last two months, which prompted the central bank to raise its inflation forecast even as it held its key rates at record lows earlier this month.

To counter the economic fallout of the pandemic, the central bank has pumped in massive amounts of liquidity through various measures like open market operations over the last year, leaving the banking system with an average surplus of around 6 trillion Indian rupees ($80.8 billion).

Sitharaman said that it is “very clear” that India’s economy has started recovering as exports have begun to grow rapidly and tax collection has increased.

The finance minister also said that it is committed to privatisation goals and along with robust tax collection it will be able to manage its fiscal deficit goals.

The government aims to narrow its fiscal deficit to 6.8 per cent by the end of the current fiscal year compared with 9.30 per cent last year.