“As regards any future easing, while it would 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 said in an interview with Business Standard published on Tuesday
Mumbai: The Reserve Bank of India (RBI) Governor Sanjay Malhotra has signaled further interest rate cuts if inflation turns out to be lower than expected. He also clarified that the shift in policy stance to neutral in the bi-monthly monetary policy this month was intended to provide flexibility in supporting growth, and not to signal an immediate reversal of policy.
“As regards any future easing, while it would 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 said in an interview with Business Standard published on Tuesday.
Following his dovish comments, Indian government bond yields and overnight index swap rates both eased in early trading on Tuesday. The yield on the benchmark 10-year bond stood at 6.2622 per cent in early trade, compared with its previous close of 6.2732 per cent.
The RBI on June 6 surprised the markets by cutting the repo rate by 50 basis points to 5.5 per cent and reducing the cash reserve ratio by 100 basis points, phased over four 25-point tranches from September to November. The move is expected to inject ₹2.5 lakh crore into the system. However, it changed the stance to neutral from accommodative, indicating that the rate-cutting cycle may be at its fag end.
Malhotra clarified that the shift to a neutral stance was intended to provide flexibility in supporting growth, not to signal an immediate policy reversal. 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,” he 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.
