Financial conditions have tightened the economy with liquidity going into a deeper deficit putting upward pressure on short-term rates, according to a research report by CRISIL Market Intelligence and Analytics.

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The report released during the month also said that foreign portfolio investors turned net sellers further aggravating the tight liquidity conditions.

With tightening of the liquidity, the transmission of interest rates improved across lending and deposit rates in January.

However, the cumulative rise in most deposit and lending rates remained lower than the 250 basis points of repo rate increase by the RBI since May 2022, the report said.

This incomplete transmission of monetary policy prompted the Reserve Bank of India to keep the interest rates unchanged, the research body said in the report.

"We believe that the central bank will be active in liquidity management and adopt regulatory measures to prevent excesses in credit growth."

"We foresee the RBI cutting rates from June 2024," it said.According to the report, the deficit in domestic systemic liquidity almost doubled in January compared with December.

This has led to a net infusion of Rs 2.07 lakh crore into the system, which is one per cent of net demand and time liabilities (NDTL) by the RBI.

The report said that liquidity has been in deficit in the economy since September 2023.

Due to a crunch in liquidity, money market rates are under pressure with the call money rate hovering above 6.75 per cent, the report said.Foreign portfolio investors (FPI) turned net sellers in January after two months of inflows, it added.