India’s cash deficit to worsen: JP Morgan

J.P.Morgan held that:

• Since Govt spending remains half hearted, India’s liquidity deficit will decline more, hitting 1.5 lakh crore in June 2012.
• Core liquidity deficit could hit 1 lakh crore by the end of June, 2012.

For this JP Morgan recommended:

• The deficit would only come down if there are more cuts in the CRR or more open market operations.
• If they want to bring down core liquidity deficit to their comfort band, RBI needs to purchase Rs 35,000 crore in bonds via OMOs by June, 2012.
• Since investors continue to receive 5-year OIS as weak rupee likely to induce greater intervention by the RBI, and thus sterilisation via OMOs, which will push down bond yields.