......The RBI's liquidity stance is a poor response to a flawed need to defend the rupee. But it could prove to be very strong medicine for the banking sector. On the one hand, lack of liquidity would prevent ever-greening of sticky assets and this should flush NPAs out of the system. On the other hand, the tightening would make it very difficult to support any resurgence in credit demand and that is bound to adversely impact growth. And, of course, a combination of low liquidity and falling equity valuations makes recapitalisation almost impossible in the short term. Every bank will have to contend with higher rates, sluggish credit growth and dodgy asset quality; but public sector banks will be especially stressed given their much higher exposure to bad loans..........
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