In wake of drying dollar liquidity, Federal Reserve must adjust its balance sheet shrinkage pace so as to minimise its effect on emerging nations. \u201cGiven the rapid rise in the size of the US deficit, the Fed must respond by slowing plans to shrink its balance sheet. If it does not, Treasuries will absorb such a large share of dollar liquidity that a crisis in the rest of the dollar bond markets is inevitable,\u201d RBI Governor Urjit Patel wrote in Financial Times. The Federal Reserve started reduction in reinvestment of coupon that it receives from debt securities holdings, beginning October 2017. It is expected that the balance sheet shrinkage reduction will rise at $50 billion a month by October and total $1trillion by December 2019. \u201cA rough rule of thumb would be to reduce the pace of its balance-sheet contraction by enough to damp significantly, if not fully offset, the shortage of dollar liquidity caused by higher US government borrowing,\u201d Urjit Patel said. RBI's Monetary Policy Committee (MPC) on Monday began 3-day meeting amid speculations that key interest rate may be hiked for the first time after four-and-half years on account of firming prices of crude oil and high inflation. The six-member MPC, headed by Reserve Bank of India (RBI) Governor Urjit Patel, is meeting for three days for the first time instead of the usual two days due to some administrative exigencies. The resolution of the second bi-monthly monetary policy meeting in the current financial year, 2018-19, will be made public on Wednesday afternoon. It was in January 2014 that RBI had last raised the short-term lending rate (repo) to 8 percent; since then it has either reduced it or maintained status quo. The current repo rate stands at 6 percent.