Poonam Gupta: Deputy RBI governor's focus could be liquidity conundrum

Her appointment comes less than a week before a meeting of the monetary policy committee

Manojit Saha Mumbai

5 min read Last Updated : Apr 02 2025 | 11:41 PM IST

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Poonam Gupta, the new deputy governor of the Reserve Bank of India (RBI), is likely to get the all-important monetary policy department among others. She may have to find a way to improve monetary transmission at a time the central bank has started the interest rate cutting cycle. Her appointment comes less than a week before a meeting of the monetary policy committee (MPC).

Gupta is presently the director general of the National Council of Applied Economic Research (NCAER), the first woman to head the New Delhi think tank. She is also a member of the Economic Advisory Council to the Prime Minister and the convener of the Advisory Council of the 16th Finance Commission. She may have to relinquish both these roles before assuming charge as deputy governor.

The six-member MPC – Gupta will be part of it as deputy governor in charge of monetary policy –reduced the policy repo rate in its last review meeting in February. The rate cut was the first by the central bank in almost five years. The rate-setting panel, which will meet April 7 to 9 for the first review of FY26, is widely expected to deliver another rate cut.

Gupta has Ph.D in Economics from the University of Maryland, USA, and a Master’s in Economics from the Delhi School of Economics, Delhi University.

Despite the February policy rate cut, transmission to bank lending and deposit rate remained elusive. Banks cut the external benchmark linked rate (EBLR): it is meant for retail and small business loans and mostly linked to the repo rate. But loan rates to corporates, based on the marginal cost of funds based lending rate (MCLR), have by and large remained unchanged. Banks are yet to reduce deposit rates. As MCLR is linked to the cost of funds, banks would not be in a position to cut until they see a reduction in deposit cost EBLR and MCLR have a share of 40 per cent each in banks’ loan books.

The key to transmission is banking system liquidity, which remained in deficit for almost four months before turning into a small surplus over the weekend. The RBI has injected over Rs 5 trillion of durable liquidity into the banking system through government securities purchases via open market operations auctions and dollar-rupee buy-sell swaps. Another Rs. 1.8 trillion was infused through repos maturing in early April.

Typically, transmission happens with a lag, and in RBI’s experience with a two quarter lag. But Governor Sanjay Malhotra has said the central bank wants transmission as quickly as possible.

“It will be our effort that we provide whatever support and liquidity is required that this transmission happens as quickly as possible,” Malhotra said in the post-policy press conference in February.

RBI officials will meet bankers on Thursday to fine-tune the liquidity framework.

Gupta, who specialises in macroeconomics and issues related to the Emerging Market Economies, takes up her new role at a time when there is a debate raging if the RBI should target core inflation instead of headline inflation. Headline inflation spikes mainly due to food prices and it is argued by some that monetary policy tools are not effective to have any impact on supply-side issues. The debate is important because a review of the monetary policy framework is due and will come into effect for a five-year period from April 1 next year.

Gupta, in an August 2024 joint NCAER paper with Barry Eichengreen, distinguished professor of economics and political science at University of California, Berkeley, argued that evidence suggested that the inflation targeting framework in the last eight years pointed to improved outcomes with inflation becoming lower and less volatile, inflation expectations are better anchored and the transmission of monetary policy is more effective.

“Given this record, radical changes such as broadening the RBI’s monetary mandate, abandoning the target in favor of a more discretionary regime, targeting core instead of headline inflation, or altering the target and tolerance band would be risky and counterproductive,” the authors said while suggesting updating the weight of food prices in the CPI basket. They suggested that the correct weight of food at today’s per capita income to be closer to 40 per cent instead of the current 45.8 per cent.

“This would likely fall further to around 30 percent in a decade from now due to the projected increase in per capita incomes. This correction should ameliorate concerns about the design and practice of the current inflation targeting regime,” the paper said.

The market will track Gupta’s view in the April monetary policy: Whether she votes for a more than 25 basis points rate cut, which will indicate her priority between growth and inflation. Also, whether she votes for a change in the stance of the policy from neutral to accommodative given the magnitude of liquidity infusion in the last few months. All six members of the MPC voted for a status quo on the neutral stance in the February policy review.