The Reserve Bank of India (RBI) is expected to remain on hold at the monetary policy meeting, scheduled to be held on April 6, while introducing a new policy tool to drain excess liquidity. The central is likely to retain a "neutral" stance on Thursday, aimed at striking a balance between bolstering the nation’s economic growth and securing the retail inflation target of 4 percent ±2 percent on a durable basis.

The RBI will likely introduce a new monetary policy tool called Standing Deposit Facility (SDF) to help absorb surplus cash from the banking system without the need for collateral. Earlier on 24 March, India’s finance ministry held a meeting with bankers to discuss setting up the SDF framework to manage excess liquidity, Scotiabank reported.

India’s retail inflation picked up to 3.65 percent y/y in February from 3.17 percent a month ago. It is likely to slide in the second half of this year if the nation receives normal rainfall in the June-September monsoon period.

There was about INR3.1 trillion of excess liquidity in Indian banking system as of March 31, given continued portfolio inflows post the presentation of Union Budget FY2017-18. Foreign investors have purchased a net USD3.80 billion of Indian shares since the Bhartiya Janata Party (BJP) won the UP assembly election on March 11, while adding to their holdings in local bonds by USD3.88 billion. Strong portfolio inflows have resulted in a 2.43 percent rise in the INR during the same period.

"We expect USD/INR to consolidate above the 64.6 support level for a while as the central bank’s two-way operations will finally slow the pace of appreciation in the INR," the report commented.