RBI may cut rates further if inflation falls or growth slows: Guv Malhotra

Anup Roy and Prateek Mazumdar

 

India’s central bank will consider cutting interest rates further if inflation falls below its projection or growth comes under pressure in Asia’s third-largest economy, Governor Sanjay Malhotra said. 

“The monetary policy committee will always factor in the evolving situation, the outlook, and then decide what the economy really needs,” Malhotra said in an interview with CNBC-TV18 on Tuesday. “Certainly the policy rates can be cut” if inflation is lower than the central bank’s forecast or growth remains weak, he added. 

While price stability remains the central bank’s primary objective, growth is also a key consideration. In its June monetary policy meeting, the central bank delivered an unexpectedly large cut in its key rate to help revive India’s slowing economy. “Both are equally important, and I would not say we are giving more weight to either number at this point,” Malhotra said. 

 

The comments come a day after inflation eased to the lowest in more than six years in June, driven by slowing food prices. Economists remain divided on whether cooling prices will be enough to cut rates in the next policy meeting on Aug. 6.  

The central bank will continue to be data-dependent going forward, the governor said, adding that there is an expectation that inflation for the current year could undershoot its 3.7 per cent forecast.  

The Reserve Bank of India lowered the benchmark repurchase rate by 100 basis points since February, including a half-point cut and a shift to a relatively hawkish neutral stance in the last policy meeting. 

While the moves in June initially caused confusion among central bank watchers, Malhotra had clarified that the RBI would consider rate cuts if inflation fell below its projections.  

The 10-year benchmark bond yield traded steady at 6.32 per cent, while the rupee was 0.2 per cent stronger at 85.82 per dollar. 

Malhotra said on Tuesday the RBI’s policy framework seeks to keep overnight borrowing costs aligned with the benchmark repurchase rate, currently at 5.5 per cent. It seeks to do that by injecting or absorbing liquidity as needed.

Bank ownership

The central bank is reviewing its norms on bank ownership, which may include allowing foreign banks greater stakes in local lenders.  

The central bank will examine if foreign banks can be allowed to own 26 per cent in local banks “as a general matter of policy,” the governor said. Currently, while foreign investors, including portfolio investors, can own up to 74 per cent in Indian banks, regulations cap a strategic foreign investor’s stake at 15 per cent. 

However, the RBI can review and allow request by an investor to raise the stake to 26 per cent. These ambiguities will be addressed in the review as the RBI streamlines the norms, he said. 

When asked whether the regulator would reverse its age-old concerns on letting business conglomerates to own banks, the governor said, “conducting business and real economic activities within the same group has conflict of interest.” 

Malhotra also said an internal committee of the RBI has reviewed the existing liquidity management framework and it will release a report by the end of this month detailing the findings.