Going by past trends, transmission has happened much faster: RBI

Governor Sanjay Malhotra says monetary transmission is already outpacing past trends; FY26 growth projection held at 6.5%, but upside potential remains

Reserve Bank of India Governor Sanjay Malhotra, along with deputy governors, responded to a wide range of questions during the post-policy media interaction. Edited excerpts:

 

Where do you see the terminal rate in this rate cycle?

 

Malhotra: We have changed the stance from ‘accommodative’ to ‘neutral’. And it has been mentioned that there is now limited space for monetary policy, given the current circumstances. And you are aware of the current circumstances, which is that growth is at about 6.5 per cent. We are projecting the inflation rate at 3.7 per cent for this year, and next year it is at 4.5 per cent, or around that. If these were to play out, there is very limited space for the monetary policy committee (MPC) and that is why rate has been reduced now. The MPC stated it would monitor the incoming data. Which way we move depends primarily on what the data suggests.

 

With the stance being changed to ‘neutral’, will there be a long pause?

 

Malhotra: It will depend on the data now. This is what ‘neutral’ means. I had explained it in the earlier MPC statement that ‘neutral’ means it can go either way. It will depend on how the data comes in. If growth is weaker, it can mean it will go down. If growth is good and the inflation rate is going up, it means the repo rate can go up.

 

Was there a voting on stance?

 

Malhotra: The statute does not mandate voting and there was none. There was a discussion on it. Everyone, all the six MPC members, was of the view that we should change it to ‘neutral’. It is more of a guidance we have to give market participants. 

 

Are you satisfied with the monetary transmission so far?

 

Malhotra: Going by past trends, transmission has happened much faster. In money markets, you can see a huge transmission — more than what we have done — especially at shorter-term levels. And on the credit side also, we are seeing some signs. Deposit rates, retail and wholesale, have been reduced by most of the banks. The average is about 27 basis points. From the first policy cut of 25 basis points, there has been a cut of 27 basis points on deposits, 17 basis points on credit (outstanding), and six basis points on fresh loans. I think this is good transmission. However, we need to do it faster and that is why we have front-loaded some of our actions.

 

What is the growth boost you are expecting from the cumulative 100 basis point rate cut so far? Would there be a revision for the growth projection for FY26?

 

Malhotra: It has a positive impact (on growth). It will be difficult to assess as to how this transmission happens from monetary policy to the credit rates and then to the real economy. Going by history, it takes six to nine months. We would like to expedite it, but we will see the impact of this only in the latter half of the financial year.  So, for this year, in terms of numbers, especially when there is so much uncertainty, we would not be in any position to tell you to what extent it will impact the gross domestic product (GDP) numbers.

 

What is the advantage of having so much liquidity in the banking system?

 

Malhotra: Monetary policy is not a sufficient condition, it is a necessary condition. We are confident that it will translate into better credit growth. One can say it will increase the flow of credit and so that is why this liquidity is important.

 

The GDP growth target for has been kept unchanged at 6.5 per cent. Is there scope of revision of the projection

 

Malhotra: The aspiration is much more -- between 7 and 8 per cent.

 

The intent and message behind Friday’s announcements?

 

Malhotra: The broader message is that inflation is under control. We have brought it down to 3.7 per cent against our earlier expectation of 4 per cent.  Likewise, growth is at 6.5 per cent, which is good; however, there is still room for an upside in growth. We believe in decisiveness and timely implementation. I believe we needed to give certainty to the markets and banks and that is why the MPC statement said we were going to front-load the rate cut. We had to cut rates by 50 basis points, which we did at once in order to provide certainty. On the cash reserve ratio, we could have announced it four months later but we did it today (Friday) because the banks will gain certainty. We had promised to provide liquidity, and we delivered it.  Controlling inflation and keeping it aligned with the target are our main motives. After that growth is our focus.