RBI May Have Easing Room If Inflation Undershoots, Governor Says

India’s central bank may have space for further policy easing if inflation undershoots its projections, according to Governor Sanjay Malhotra. 

“As regards any future easing, while it will not be right on my part to preempt the Monetary Policy Committee, if the inflation outlook turns out to be below our projections, it will open up policy space,” Malhotra, said in an interview to the Business Standard newspaper published on Tuesday. 

Earlier this month, the Reserve Bank of India delivered a bigger-than-expected interest rate cut and announced a liquidity boost for the banking system. Investors were spooked after the authority simultaneously shifted from accommodative to neutral stance, sparking fears of tighter funding conditions.

The stance change suggests flexibility to support growth, rather than an immediate policy reversal, Malhotra said in the report. Any liquidity fine-tuning operations through variable rate repurchase or reverse repo auctions do not impact durable liquidity, he added.

“The RBI will continue to weigh the trade-off between keeping the weighted average call rate closer to the Standing Deposit Facility rate for better transmission or closely aligned to the policy repo rate as part of the framework and act accordingly,” Malhotra said. 

The SDF is the rate which banks receive for parking overnight funds with RBI. This rate is currently 25 basis points below the repo rate.

The central bank chief also said that it wouldn’t be correct to say that the cash reserve ratio will be used frequently for liquidity management. The authority surprised traders with a hefty 100 basis point cut in the CRR in the June policy.