Policy space to open up if inflation is below projections: RBI Governor

Reserve Bank of India Governor Sanjay Malhotra reiterated that the RBI will continue to watch the incoming data on inflation and growth, and take a call

While cutting the key policy repo rate by 50 basis points (bps) and changing its policy stance to neutral from accommodative in its June review, the Reserve Bank of India said that monetary policy is left with limited space to support growth. Sanjay Malhotra, Governor, Reserve Bank of India, explains the rationale behind the large rate cut and the change in stance while clarifying the role of the cash reserve ratio in an exclusive interview with Manojit Saha in Mumbai. He reiterated that the RBI will continue to watch the incoming data on inflation and growth, and take a call. Edited excerpts:

 

CPI inflation for May, at 2.82 per cent, was below expectations. Does that open up some more space for easing? Which will give you more comfort for further policy easing – lower than expected inflation or lower than expected growth? In hindsight, do you think the stance change to neutral signaled a more hawkish tone to the market than you had expected?

 

The MPC was of the view that the current macro-economic conditions and the outlook warranted a neutral stance after bringing the repo rate down to 5.5 per cent. It is pertinent to highlight that it is not only the current macroeconomic conditions including current inflation that matter but more importantly, the outlook for these. While the CPI headline inflation for April 2025 was 3.2 per cent, the projection of CPI headline for 2025-26 is 3.7 per cent and that for Q4 is 4.4 per cent. It was explained in the April monetary policy statement that a neutral rate is associated with a state of the economy which neither calls for stimulating economic activity nor calls for controlling inflation by curtailing demand and provides flexibility to move in either direction on the basis of evolving economic conditions.

 

The 2.8 per cent inflation is in line with our expectations. In fact, for Q1 of 2025-26, our projection given in the MPC resolution is 2.9 per cent. The average inflation for April-May works out to 3.0 per cent. So, policy decisions were taken by the MPC in its June meeting keeping these numbers in mind.

 

As regards any future easing, while it will not be right on my part to pre-empt the MPC, if the inflation outlook turns out to be below our projections, it will open up policy space. As noted by the MPC, it will be carefully assessing the incoming data and the evolving outlook to chart out the future course of monetary policy in order to strike the right growth-inflation balance.

 

Markets have a way of interpreting monetary policy communication and the stance in terms of these avian terminologies. To my mind, neutral by definition is neither hawkish, nor dovish. The change in stance to neutral from accommodative does not imply an immediate reversal in the policy cycle; rather, it is a reflection of the current setting of monetary policy and how much more space it has to support growth. We will continue to watch the incoming data on inflation and growth and take a call. 

 

Do you think the real economy can absorb the huge liquidity that has been infused so far? CRR cuts will also be implemented. Is the RBI cognizant of the fact that if the real economy cannot absorb this liquidity, it may result in asset price bubble?

 

The Reserve Bank endeavours to maintain sufficient liquidity in the banking system so that productive requirements of the economy are met and transmission to market rates remains smooth, while ensuring that it does not create an asset price bubble. Even otherwise, we have robust regulations and effective supervision to ensure that credit is deployed prudentially.

 

Some reports speculate re-introduction on VRRR to suck out some parts of the surplus liquidity and that CRR – as a liquidity tool, may be used more frequently. We would like to know if you are comfortable with weighted average call rate at the lower end of the corridor, given we are in the easing phase? Do you see CRR as a liquidity management tool or is it more of a safety net/buffer that needs to be maintained by banks?

 

The guiding principle of liquidity management framework of the Reserve Bank is to maintain the operating target of monetary policy, i.e., WACR close to the policy repo rate. However, it is not unusual for WACR to trade in the lower segment of the LAF corridor in surplus liquidity conditions. Also, keeping system liquidity in surplus helps transmission during the easing cycle. The Reserve Bank will continue to weigh the trade-off between keeping WACR closer to the SDF rate for better transmission or closely aligned to the policy repo rate as part of our framework and act accordingly.

 

I would like to emphasise that fine-tuning operations, whether through the VRRR or the VRR, do not impact durable liquidity. As stated earlier, we remain committed to maintain sufficient durable liquidity in the banking system.

 

As for CRR, it is one of the tools of monetary policy and a particularly potent one to manage durable liquidity. CRR used to be as high as 15 per cent in the eighties and was gradually reduced to 4 per cent by 2013. It has since been reduced only once, that too by only one per cent to infuse liquidity. 3 per cent of reserves seem adequate to be used as a monetary policy tool to provide liquidity, when needed.  Higher the reserves, lower is the money supply available for credit and higher the cost for the banks. The banks have been requesting for a lower CRR.

 

The reduction in CRR should be seen in this context. It would not be correct to infer that CRR will be used frequently for liquidity management.

 

There is a committee examining the liquidity framework? What are the key issues that the committee is looking at?

 

Yes, the liquidity framework is being examined. It is a complex subject because there are various market segments. What should be the operating target, is the main issue. That is still under examination.

 

Banks have started to cut lending and deposit rates after the June policy. Are you fine with monetary transmission with banking channels, or you look forward to transmission via the risk free sovereign bond market channel. Do you also expect transmission via NBFCs to improve?  Do you think the steepening of the yield curve will auto correct because of surplus liquidity?

 

Monetary policy transmission happens with a lag. The transmission in this cycle has been faster. The frontloading of rate cut aims for faster transmission, of which there are good early signals, as many major Banks reduced both lending and borrowing rates immediately post the MPC meet.

 

Available data shows that in response to a cumulative reduction of 50 bps in the repo rate in February and April policy, the lending and deposit rates had moderated by 6 bps and 27 bps on fresh loans and fresh deposits, respectively, during February-April 2025. While the transmission of policy rate cuts of earlier 50 basis points to banking channel continues, additional 50 basis points cut effected recently should also get transmitted over the period.

 

While in a bank-based financial system such as ours, the banking channel is indeed crucial, transmission through risk-free sovereign bond market is equally important as it serves as the benchmark for pricing in other segments of the market. It is also important to highlight that risk-free sovereign bond market and banking channel are complementary, reinforcing each other’s transmission.

 

NBFCs cater to the credit demand of, hitherto, underserved and niche segments and are important financial intermediaries for monetary policy transmission. The dynamics of interest rates charged by NBFCs are different as compared to commercial banks reflecting, inter alia, their liability structure and the risk profile of their borrowers. Thus, the speed and degree of monetary policy transmission differs between NBFCs and banks.

 

Coming to sovereign bond yields, to put things in perspective, 10-year and 30-year spreads over the policy repo rate stand at about 84 bps and 150 bps, respectively, as on June 12, 2025. These spreads are in line with the historical average (since April 2016 excluding the Covid period) of 97 bps and 132 bps, respectively. Moreover, they are significantly lower than their levels of 212 bps and 281 bps, respectively, during the COVID period. Therefore, the current levels of bond yields remain congenial. 

 

Rupee has underperformed its emerging market peers. Dollar has depreciated but rupee has not appreciated against the dollar. Is the RBI comfortable with such a situation?

 

The Reserve Bank’s exchange rate policy has remained consistent over the years. The stated objective is to maintain orderliness and stability, without compromising market efficiency. Accordingly, RBI’s interventions in the forex market focus on smoothening excessive volatility rather than targeting any specific exchange rate level or band. The exchange rate of the Indian Rupee is determined by market forces.

 

Having said this, I may add that it is not appropriate to compare prices over short periods. From 2023 till date, INR has performed better than CNY, IDR, KRW and even Japanese Yen.

 

Improving customer service by regulated entities has been a key focus area for you. Do we expect regulatory measures/steps to enhance customer service/grievance redressal mechanism?

 

Customer service has been a focus area where we need continuous improvement. Regulated Entities (REs) should have a frictionless banking experience where customer expectations are anticipated, need based services are provided fairly and transparently, and processes are seamless. This represents a shift from reactive service to a proactive approach.

 

I would urge all REs to improve service delivery. Higher management must spend some time every week on customer service and grievance redressal.

 

During the last couple of years, we have taken a number of steps which include instructions on digital lending, Key Facts Statement for retail and MSME loans, reset of floating rate interest in EMI based personal loans, penal charges in loan accounts, timely release of property documents, revised instructions on inoperative accounts/ unclaimed deposits in banks, etc.

 

This will continue to remain a priority area for us. We plan to strengthen the regulatory regime. We are also reviewing the compensation mechanism for customers under the RBI Ombudsman Scheme to enhance its deterrent effect.

 

Updating of KYC is a pain point for customers. Do you think there is scope for revisiting the norms, or this is more of an implementation issue by regulated entities?

 

We are working on two aspects in this regard. A KYC with one regulated entity in the financial sector should get recognised by all regulated entities, thereby obviating another KYC when a relationship is established with another regulated entity. Moreover, updation of address with a regulated entity should result in updation with other regulated entities of any financial sector regulator.

 

RBI is reviewing the bank license framework. What will it entail?  Do we expect a decision either way on SFBs’ applications for conversion to universal banks any time soon?

 

The proposed review of the bank license framework shall be a study and assessment of the extant framework, in the context of current as well as the evolving economic priorities, so that Banks are able to meet the funding needs of aspirational India.

 

As far as SFBs’ applications for transition into Universal Banks are concerned, these applications are under various stages of assessment and processing. A decision on the applications will be taken soon.

 

In the last six months, RBI has reviewed a lot of issues on the regulation side, following which, norms were relaxed on a lot of areas — Liquidity coverage ratio, Alternative Investment Funds, on gold loans, microfinance institutions were relaxed. What was the thinking behind the moves?

 

Each one has a different reason. I would not like to look at it as a relaxation. We are here to regulate and supervise the banks in such a way that they are able to meet the needs of the economy in a sustainable way. We would like them to lend, but lend prudentially.  The fine balance between cost and benefit of regulation has to be maintained. And we will continue to maintain that balance.

 

We have heard that RBI is thinking about possible regulations to curb mis-selling. Can you shed some light on the issue?

 

There are instructions already in place which require that the needs of the customers should be assessed properly and there is no mis-selling.  We will continue to endeavour to improve the business conduct framework and supervision so that complaints for mis-selling are minimised if not eliminated.

 

Is there pressure from the US, after Donald Trump assumed office for the second time, to open up crypto currency? What are your views on the issue?

 

There is no pressure. We will decide whatever is in our best interest. Having said this, let me inform that there is an inter-ministerial group (IMG) including RBI, formed by the government, which is looking into this. There are concerns due to its potential impact on monetary policy, on the management of currency, capital controls, etc.  I am sure all these will be looked into. And at the same time, we continue to promote innovation. We will also continue to encourage & facilitate adoption of the underlying technologies like DLT, blockchain, etc. But wherever there are concerns from a monetary policy and financial stability perspective, we have to be careful.

 

You have lowered interest rates, the government has cut income tax to spur consumption. Is it time to also rationalise GST rates for a further boost to consumption and make classification issues a thing of the past through fewer slabs?

 

GST has been a game changer. I was handling this subject earlier when I was in the Department of Revenue in the Ministry of Finance, Govt. of India. It has been a win-win-win for the stakeholders. It is a win for the central government and the state governments because their revenues have improved and leakages have reduced. It also a win for the businesses and industries because their costs have reduced. It is a win for the customers as well because the tax rates have actually come down.

 

Is there scope to raise the Liberalised Remittance Scheme (LRS) cap?

 

A resident individual can remit up to USD 250,000 per financial year under the LRS for permissible capital account transactions and some current account transactions of personal nature. Amounts beyond the LRS cap can be remitted by the AD banks for purposes such as medical, education, and travel for medical, education and emigration, after verifying the bona fides. There is no proposal to increase the cap.