Reserve Bank of India's Monetary Policy Update
Interview Insights
The Reserve Bank of India (RBI) Governor, Sanjay Malhotra, addressed marketplace confusion post the Monetary Policy Committee’s (MPC) decision to reduce the policy repo rate.
Key Decisions and Rationale
- Policy Repo Rate Reduction: The MPC reduced the policy repo rate by 50 basis points to 5.5%, exceeding market expectations of a 25 basis point reduction.
- Stance Change: The MPC shifted from an "accommodative" to a "neutral" stance, indicating all policy options remain open, but not signaling an immediate policy reversal.
Supporting Actions
- Cash Reserve Ratio Cut: A reduction by 100 basis points to 3% will happen in four stages, injecting ₹2.5 trillion liquidity into the system.
- Liquidity Management: The RBI aims to keep the Weighted Average Call Rate (WACR) close to the liquidity corridor's lower end to enhance policy transmission.
Forward-Looking Approach
The monetary policy is forward-looking, with inflation projections being pivotal. The MPC expects an average inflation rate of 3.7% this financial year, slightly above 4% in the second half.
Research Findings and Future Projections
- Neutral Rate: Research indicates the neutral rate lies between 1.4% and 1.9%. Maintaining the real repo rate within this range limits scope for further cuts unless inflation forecasts significantly drop.
- Policy Outlook: A prolonged pause in rate changes is anticipated unless inflation projections shift considerably.
