Review of the monetary policy framework on RBI's agenda for FY26

Central bank also likely to assess liquidity level needed for policy transmission

The review of the monetary policy framework and studying the optimal level of liquidity in the banking system which is needed for monetary policy transmission are the key agendas for the central bank in the current financial year, the Reserve Bank of India (RBI) said in its annual report for 2024-25 released on Thursday.

 

The government, in consultation with the RBI, determines the inflation target in terms of the headline CPI inflation once in five years. On March 31, 2021, the Central government retained the inflation target (4 per cent) and the tolerance band (+/-2 per cent on either side) for the next 5-year period, that is April 1, 2021 to March 31, 2026.

 

The review assumes significance in view of the recent commentary from various quarters, including the economic survey, which called for setting core inflation, that is headline inflation minus food and fuel, as the target for the central bank in view of heightened volatility of food prices.

 

“Higher food prices are, more often, not demand-induced but supply-induced. Short-run monetary policy tools are meant to counteract price pressures arising out of excess aggregate demand growth,” the Economic Survey had said, while arguing for re-examining the framework.

 

Reassessing the optimal level of liquidity to ensure effective monetary transmission is another important agenda for the RBI in the current financial year. 

 

The annual report noted that the external benchmark linked rate (EBLR) regime has strengthened and quickened the pace of transmission.

 

“The proportion of EBLR-linked loans in outstanding floating rate rupee loans of SCBs increased further during 2024-25. Concomitantly, the share of the MCLR-linked loans fell during the year,” the report said.

 

The six-member monetary policy committee has reduced the policy repo rate by a cumulative 25 bps since February. The central bank has pumped in ample liquidity in the system with an aim to increase monetary transmission.

 

RBI governor Sanjay Malhotra has indicated that RBI will keep the system liquidity with 1 per cent surplus of banks’ net demand and time liabilities.

 

“I again reiterate that we will provide sufficient liquidity for the purposes of monetary policy transmission. I do not want to give a number, really, as to what kind of a surplus, but sufficiently in surplus. And you mentioned linking it to NDTL. Well, yes, that is the kind of number, about 1 per cent or so, in the surplus range, now that we are on the easing cycle. That is the kind of number that we will be looking at, and we will keep it sufficiently surplus,” said the RBI Governor Sanjay Malhotra in a post policy press conference in April.

 

As of May 2025, system liquidity averaged around ₹1.6 trillion, or 0.7 per cent of Net Demand and Time Liabilities (NDTL), and is projected to rise to approximately ₹5 trillion, or 2 per cent of NDTL, by the end of August.

 

Loans linked to external benchmarks such as the repo rate reflected the cut almost immediately, the Marginal Cost of Funds-based Lending Rate (MCLR)-- which was closely tied to banks’ deposit costs-- adjusted more slowly, delaying the broader transmission of the rate cut.

 

As per the latest RBI data, net system liquidity stood at a surplus of ₹1.91 trillion as of Wednesday.