As a large portion of government spending happens in the last quarter of the financial year ending March, the country's persistent tight condition is likely to ease in coming months, said C. Rangarajan, chairman of the Indian Prime Minister's Economic Advisory Council.

"I do think that in the second half of the year, particularly in the last quarter of the financial year, public spending increases and as a consequence the liquidity situation will ease," he said.

Another way to increase liquidity, which has tightened sharply in the Indian banking system since October on low government spending and large cash withdrawals from banks during the festive season, and profitability is consolidation, said Rangarajan.

Indian banks "may acquire rivals to boost profitability," he said. "Any process of consolidation must, however, come out of a felt need for merger rather than as an imposition from outside."

Rangarajan said RBI will continue to take measures to improve money supply in the system. "I think the RBI will take necessary steps to ensure that adequate liquidity is present in the system," he added.

Regarding inflation, Rangarajan said the trend indicates that it will fall. "We think that by end of December inflation should come down to 6.5 percent," he said.

India's annual food inflation eased to its lowest level in 18 months in the year to Nov. 20, pressed down by lower prices of potatoes, pulses and vegetables, in line with policymaker forecasts.

Indian economy could absorb up to $70 billion, said Rangarajan, referring to the foreign capital inflows.