Six-week long election leaves RBI with liquidity dilemma

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Key Points

RBI is stepping in to ease banking system liquidity conditions as a national election which stretches over six weeks is hurting government spending despite strong tax collections...

Typically, government spending slows during polls and picks up only after a new government is in place and a budget is presented...

The buyback of securities is a liquidity injecting tool, and will help in easing liquidity in the system, a source familiar with the government's thinking said.. India's average banking system liquidity has been in deficit since April 20 and is expected stay in deficit or close to neutral this month, according to economists...

"The buyback announcement could be an exercise to infuse liquidity because we have an interim budget and the general election, so the government expenditure is lesser than usual," Gaura Sen Gupta, India economist at IDFC FIRST Bank said...

Since mid-April, the Reserve Bank of India (RBI) has infused Rs 1.7 lakh crore via variable rate repo auctions, Citi economists said in a note on Monday.. "The RBI might be anticipating that the election-related delayed decision-making in the government might constrain spending and in turn cause further liquidity tightness," they said...

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