Quicker Transmission This Time: RBI Governor
RBI Governor Sanjay Malhotra Emphasizes Rapid Monetary Policy Transmission
RBI Governor Sanjay Malhotra recently highlighted the swift transmission of monetary policy this time around, with deposit and lending rates already showing a decrease following rate cuts. The abundance of liquidity, CRR reductions, and proactive measures aim to enhance credit flow, although the full impact hinges on market dynamics and global conditions.
During a post-policy press conference, Malhotra emphasized the expedited pass-through in comparison to previous instances. “That’s why we have frontloaded some of our actions to expedite the process,” he mentioned. Typically, it takes six to nine months, but this time, it has only been four months since the initial policy cut, Malhotra stated.
Providing statistical evidence, Malhotra pointed out that average deposit rates have decreased by 27 basis points, while lending rates for existing credit have dropped by 17 basis points post the 25 basis points cut in February. Despite the faster transmission of lending and deposit rates, Malhotra acknowledged that broader economic transmission may be gradual due to global uncertainties.
India Ratings & Research Director, Soumyajit Niyogi, explained that the strong demand for bonds versus limited supply, alongside RBI’s liquidity-enhancing measures like OMO, accelerated the bond market transmission. The comfortable liquidity surplus in the banking system bolstered the transmission of policy repo rate cuts to short-term rates.
To further augment liquidity, the RBI slashed the cash reserve ratio by 100 bps to 3%, injecting approximately Rs 2.5 lakh crore into the banking system by December. This reduction is anticipated to lower banks’ funding costs, aiding policy transmission to the credit market, as per Malhotra.
Malhotra reiterated that monetary policy transmission is contingent on macroeconomic conditions and credit demand, ultimately resting on market forces. “We cannot regulate credit provision or interest rate reductions; it is up to market forces,” he concluded.
