“As regards any future easing, while it will not be right on my part to preempt the Monetary Policy Committee, if the inflation outlook turns out to be below our projections, it will open up policy space,” Malhotra told Business Standard in an interview published on Tuesday.
The RBI’s Monetary Policy Committee (MPC) earlier this month reduced the policy repo rate by 50 basis points, a deeper cut than anticipated. At the same time, it shifted its stance from ‘accommodative’ to ‘neutral’, prompting speculation among analysts that the rate-cutting cycle might be nearing an end.
Markets were spooked with the change in stance, as investors worried about potential tightening in funding conditions. After reducing the policy rate by a full percentage point over three successive meetings, the MPC had said in its statement earlier this month that the space for more cuts was narrowing. “Monetary policy is left with very limited space to support growth,” it said, adding that decisions going forward would be data-driven.
The central bank also pointed to global uncertainties, including unpredictable commodity prices and geopolitical tensions, as challenges.
Malhotra told Business Standard that the shift to a neutral stance was intended to provide flexibility in supporting growth, not to signal an immediate reversal of policy. He added that short-term liquidity operations through tools such as variable rate repurchase or reverse repo auctions did not affect overall system liquidity.“The RBI will continue to weigh the trade-off between keeping the weighted average call rate closer to the Standing Deposit Facility rate for better transmission or closely aligned to the policy repo rate as part of the framework and act accordingly,” Malhotra said.The Standing Deposit Facility (SDF) is the rate at which banks earn interest for overnight parking of funds with the RBI. This rate is currently 25 basis points below the repo rate.
Malhotra also said it would not be accurate to conclude that the central bank would frequently rely on the cash reserve ratio (CRR) for managing liquidity. The RBI had surprised markets earlier this month by slashing the CRR by 100 basis points to 3%.
“It would not be correct to infer the CRR will be used for frequent liquidity management,” the RBI governor said.
“Higher the reserves, lower is the money supply available for credit and higher is the cost for banks,” he added, saying the CRR reduction should be understood in that context.
The governor reiterated that the change in policy stance did not mean a turn in the policy cycle. “It is a reflection of how much more space it has to support growth. We will continue to watch the incoming data on inflation and growth and take a call,” Malhotra said in the interview.
Since Malhotra assumed office in December, the central bank has maintained surplus liquidity in the banking system. This approach, he said, ensures that the credit needs of the economy are being met.
Responding to a question on whether such high liquidity levels could inflate asset prices, Malhotra said, “We have robust regulations and effective supervision to ensure that credit is deployed prudentially.”
Surplus liquidity has pushed the weighted average call rate — the operative rate in the money markets — below the policy repo rate.
Malhotra said the central bank would continue weighing the trade-off between allowing the call rate to stay near the floor of the interest rate corridor, which would aid transmission of lower rates, or shifting it closer to the repo rate.
Liquidity fine-tuning instruments like variable rate reverse repo (VRRR) auctions, which let banks park surplus liquidity with the RBI, do not impact long-term liquidity, Malhotra said.
Last week, Reuters reported that the central bank was considering using VRRR auctions to align the call rate more closely with the repo rate and possibly use the CRR more frequently as a liquidity tool.
However, Malhotra said the use of CRR should not be seen as a regular tool for managing liquidity.
Content Source: economictimes.indiatimes.com