No easy outs

RBI faces a real dilemma

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) faces two contrasting challenges as it meets for the bi-monthly policy review. The prevailing domestic cues suggest that measures to increase liquidity are in order. Domestic bond markets have been hit by a liquidity crisis triggered by the IL&FS defaults. This has resulted in bond yields shooting up. The RBI must also consider the overhang of the central government's scheduled borrowing programme for the second half of the 2018-19 fiscal year that will suck out Rs 2.5 trillion from the system. Meanwhile, retail inflation is moderate, with the