Comfortable liquidity reinforced transmission of rate cuts in markets

Comfortable liquidity maintained by the Reserve Bank of India (RBI) through its interventions has reinforced the transmission of the policy rate cut by the central bank’s monetary policy committee (MPC) to the money, bond, and credit markets during the current easing cycle, RBI Governor Sanjay Malhotra said on Wednesday. He also assured that the RBI will maintain sufficient liquidity in the system to ensure continued smooth transmission to money and credit markets.

 

System liquidity, as measured by the net position under the liquidity adjustment facility, has been in surplus, averaging ₹3 trillion per day since the last MPC meeting, compared to an average daily surplus of ₹1.6 trillion during the previous two months.

 

“Going ahead, as the cash reserve ratio cut announced in the last policy comes into effect in a staggered manner beginning September, it will further support liquidity conditions,” Malhotra said.

 

Following the 100 basis point (bps) cut by the RBI’s MPC since February, the weighted average lending rate of banks has declined by 71 bps for fresh rupee loans and by 39 bps for outstanding rupee loans between February and June.

 

On the deposit side, the weighted average domestic term deposit rate on fresh deposits moderated by 87 bps during the same period.

 

“Going ahead, the RBI will continue to be nimble and flexible in its liquidity management. We will endeavour to maintain sufficient liquidity in the banking system so that the productive requirements of the economy are met and transmission to money and credit markets remains smooth,” Malhotra said.

 

In the money market, in response to the cumulative policy repo rate cut of 100 bps in the current easing cycle, the weighted average call rate moderated by 108 bps. Since February, the three-month T-bill rate has declined by 110 bps; the three-month commercial paper rate for non-banking financial companies by 161 bps; and the three-month certificate of deposit rate by 170 bps.

 

“As transmission to money markets has been faster, large corporates have increasingly relied on market-based instruments such as commercial paper and corporate bonds to source funds, reducing their dependence on bank credit. Also, as the profitability of large corporates has increased, internal resources have become an important source for business expansion,” Malhotra said.

 

While the five-year and 10-year G-sec yields have declined by 63 bps and 28 bps, respectively, since February, over the same period, five-year AAA corporate bond yields have declined by 56 bps.

 

Separately, Malhotra noted that while bank credit growth has slowed, the flow from non-bank sources has more than offset the decline in bank credit growth.

 

Data shows that bank credit grew at 12.1 per cent during 2024-25 (FY25), slower than the 16.3 per cent growth in 2023-24 (FY24), though still higher than the average growth rate of 10.3 per cent recorded in the 10 years preceding FY25.

 

While the flow of non-food bank credit during FY25 declined by about ₹3.4 trillion — from ₹21.4 trillion to nearly ₹18 trillion — the flow from non-bank sources more than made up for this shortfall.

 

Thus, even though the growth rate of bank credit slowed last year, the overall flow of financial resources to the commercial sector rose from ₹33.9 trillion in FY24 to ₹34.8 trillion in FY25. This trend continues in the current financial year (2025-26) as well, Malhotra said.

 

Latest RBI data suggests that the pace of bank credit growth rose to 9.8 per cent year-on-year in the fortnight ended July 11, while deposit growth remained steady at 10.1 per cent.