Reserve Bank of India's New Accommodative Stance
Since Sanjay Malhotra's appointment as the governor in December, the Reserve Bank of India (RBI) has embraced a more accommodative approach, beneficial for the banking sector and economy amidst a growth slowdown.
Key Measures Implemented
- Interest Rate Cut: A notable 25 basis points (bps) reduction in the policy repo rate, the first in nearly five years.
- Liquidity Enhancements: Frequent liquidity injections, open market operations (OMOs), and daily variable rate repo auctions to address liquidity deficits, which peaked at ₹3 trillion in late January.
- Regulatory Adjustments: Postponement of regulatory norms and relaxation of risk weightings on bank loans to non-banking financial companies (NBFCs), potentially injecting ₹40,000 crore into the banking system.
- Removal of Restrictions: Lifting of regulatory restrictions on various entities like Kotak Mahindra Bank, enhancing operational performance.
Monetary Policy Committee (MPC) Actions
The MPC, in its meeting under Malhotra's leadership, opted for a less restrictive monetary policy despite inflation rates over 5%, indicating a focus on growth support.
Impact and Future Outlook
- While these measures may not immediately boost credit growth due to tight liquidity, they are steps in the right direction.
- Analysts suggest further policy support is necessary to stabilize growth, anticipating more easing through liquidity and macroprudential policies.
- Reduction in risk weights for microfinance institutions (MFIs) and NBFCs, along with repo rate cuts, are seen as credit-positive for banks in the medium-to-long term.
Conclusion
The RBI's strategic measures, including regulatory relaxations and liquidity enhancements, signify a coordinated policy approach aimed at supporting growth and boosting consumer demand amidst a cyclical economic downturn.
