Reserve Bank of India's 25 basis points (bps) policy repo rate cut was widely expected, but it was largely overshadowed by the sweeping changes in the central bank's monetary policy operating framework.
On its liquidity management framework, where the central bank made sweeping adjustments, the motivation was clearly stated: to supply "durable liquidity so as to support growth."
Also, with new instruments such as variable rate reverse repo auction in place, RBI is confident that it can fine-tune liquidity better, and therefore a narrower rate corridor is justified. We see the recent measures helping bond market sentiments and bank liquidity position materially.
This should also pave the way for more transmission as banks see their funding costs decline. Hence, the impact of the headline measure (25 bps rate cut) could well get amplified. However, as commodity prices bottom out, bank lending picks up, rural demand revives (due to fiscal policy support), and the impact of the Pay Commission materialises, RBI's inflation targeting regime will limit the scope for further rate cut.
On its liquidity management framework, where the central bank made sweeping adjustments, the motivation was clearly stated: to supply "durable liquidity so as to support growth."
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Also, with new instruments such as variable rate reverse repo auction in place, RBI is confident that it can fine-tune liquidity better, and therefore a narrower rate corridor is justified. We see the recent measures helping bond market sentiments and bank liquidity position materially.
This should also pave the way for more transmission as banks see their funding costs decline. Hence, the impact of the headline measure (25 bps rate cut) could well get amplified. However, as commodity prices bottom out, bank lending picks up, rural demand revives (due to fiscal policy support), and the impact of the Pay Commission materialises, RBI's inflation targeting regime will limit the scope for further rate cut.
Ravneet Gill
Chief executive officer, Deutsche Bank India
Chief executive officer, Deutsche Bank India
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