RBI States It Cannot Direct Banks to Offer Credit or Lower Interest Rates
RBI Governor Sanjay Malhotra Discusses Recent Monetary Policy Changes
RBI Governor Sanjay Malhotra provides insights into the recent transition to a neutral monetary stance, the speed of monetary transmission, the implications of the CRR cut, and growth forecasts. He underscores the importance of decisions based on data, clarifying that the RBI does not have the authority to compel banks to reduce interest rates or supply credit, as these choices are ultimately guided by market dynamics.
Insights from the Press Conference
During a comprehensive post-policy press briefing, Governor Malhotra, along with the deputy governors, addressed various topics. Here are some notable excerpts:
When asked if the neutral stance indicates a prolonged pause, Malhotra replied that it would hinge on emerging data. “A neutral stance allows for movement in either direction. If growth falters, rates may decrease, but if growth is robust and inflation rises, that could signal a potential increase in the repo rate,” he explained.
On Monetary Transmission
When questioned about the effectiveness of monetary transmission thus far, Malhotra noted a quicker response compared to previous trends. The money markets have witnessed a significant transmission of upwards of 50 basis points. Since the 25 basis point rate cut in February, average deposit rates have fallen by 27 basis points, while lending rates on existing credit have dropped by 17 basis points. For new loans, reductions have commenced, albeit gradually, averaging around 6 basis points according to recent data. Malhotra emphasized that this pace is swifter than in past instances, where transmission typically required six to nine months. With only four months elapsing since the first policy adjustment, he considers the current transmission advancements commendable but stressed the necessity for a faster pace, prompting some preemptive actions taken by the RBI.
Growth Expectations from Rate Cuts
In terms of growth projections stemming from the cumulative 100 basis points rate cut, Malhotra remarked, “It undoubtedly has a beneficial effect. However, estimating the transmission of monetary policy to credit rates and subsequently to the real economy is complex and generally takes a minimum of six to nine months to manifest. We should see some implications in the second half of the year. Given the current uncertainty, we cannot definitively state how this will affect GDP for this year.”
About the CRR Adjustment
Historically, the Cash Reserve Ratio (CRR) has typically hovered around 4%. When asked about the recent reduction to 3%, Malhotra stated, “CRR has predominantly remained at 4% over the years. We lowered it by 1% during the COVID period. These reserves serve mainly for liquidity management, and a 3% ratio currently appears to be suitable for such purposes. This adjustment not only aids in liquidity provision but is also expected to lessen banks’ costs and enhance their Net Interest Margins (NIM) by around 7 basis points.”
Expectations for Fiscal Support
Regarding the limited capacity of monetary policy to further bolster growth, Malhotra was asked if that indicated a need for fiscal authorities to step in. He replied, “I focus on fulfilling my responsibilities, which we have done. It’s essential that all parties contribute their share. This is beyond my purview to dictate.”
On Regulatory Actions and Market Forces
Lastly, if banks fail to transmit rates despite the support provided by the RBI, is there a potential for intervention? Malhotra responded, “While monetary policy is necessary, it is not sufficient by itself. Various factors come into play for effective monetary policy transmission, including macroeconomic conditions and credit demand. Ultimately, we need to trust market mechanisms rather than regulate by mandating credit distribution or rate reductions.”
