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Inflation below projections could open up policy space, RBI chief tells Business Standard
The RBI has maintained large surplus liquidity in the banking system since Malhotra took charge in December. This, he said, was to ensure that productive needs of the economy are met.
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Reuters - Mon, 16, Jun 2025
- 23:50 EDT
- 11
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Reserve Bank of India (RBI) Governor Sanjay Malhotra poses for a picture as he returns after a press conference in Mumbai, India, December 11, 2024 / REUTERS/Hemanshi Kamani
Inflation below the Reserve Bank of India's (RBI) current projections could open up policy space, India's RBI chief Sanjay Malhotra told Business Standard newspaper in an interview, adding that incoming data will be watched closely to strike "the right growth-inflation balance".
The Reserve Bank of India's Monetary Policy Committee cut its policy repo rate by a steeper-than-expected 50 basis points earlier this June but changed its stance to 'neutral' from 'accommodative', prompting analysts to forecast the end of the rate-cutting cycle.
ALSO READ: India bets on growth with steepest rate cut in five years
The change in stance "does not imply an immediate reversal in the policy cycle", said Malhotra in the interview published on June 17. "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," he said.
RBI has maintained large surplus liquidity in the banking system since Malhotra took charge in December. This, he said, was to ensure that productive needs of the economy are met.
"We have robust regulations and effective supervision to ensure that credit is deployed prudentially," Malhotra said in response to a question on whether the surplus liquidity could fuel an asset price bubble.
The surplus liquidity has pushed India's weighted average call rate - the operative rate - below the policy repo rate.
RBI will weigh the trade-off between allowing the call rate to trade closer to the floor of the interest rate corridor for better transmission of lower rates or pushing it back towards the repo rate, Malhotra said.
Liquidity fine-tuning operations such as the variable rate reverse repo (VRRR) auctions, which allow banks to park surplus liquidity with the central bank, do not impact durable liquidity, Malhotra said.
Reuters recently reported that the central bank would consider introducing VRRR auctions to align the call rate with the repo rate and use the cash reserve ratio (CRR) more frequently to adjust liquidity.
At its policy review, the RBI cut the CRR by 100 basis points to 3 percent in a surprise move.
"Higher the reserves, lower is the money supply available for credit and higher is the cost for banks," said Malhotra, adding that the CRR reduction should be seen in that context.
"It would not be correct to infer the CRR will be used for frequent liquidity management," he said.
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