Listen. Decoding RBI’s strategic shift to open market operations for liquidity control

The recent RBI Monetary Policy Committee meeting has captured the attention of financial experts and market participants alike. In a surprising move, the key policy repo rate was left unchanged at 6.5%, a decision that raised eyebrows considering the recent global trend of central banks increasing rates. In this businessline podcast, Hamsini Karthik, Senior Assistant Editor, businessline speaks to Nabodita Ganguly on some of the important updates from the recent RBI Monetary Policy Council meeting.

Since February, the RBI had refrained from altering interest rates, despite growing expectations of rate hikes given the global economic climate. This extended period of rate stability led many to believe that the era of rate hikes was behind us. However, this MPC meeting shattered that assumption. The decision to maintain the status quo on rates is noteworthy, as it hints at the RBI’s caution in the face of an evolving economic landscape.

One notable aspect of the MPC’s decision is the RBI’s preference for open market operations (OMOs) to manage liquidity. This was previously used on a voluntary basis, is now likely to become a more mandated tool for banks to park their excess liquidity. This shift in strategy signifies the RBI’s intent to have more control over liquidity management, influencing market yields and potentially affecting the overall economic scenario.

The recent move to eliminate the Incremental Cash Reserve ratio adds to this narrative. Banks now have just enough liquidity for their lending activities, and the OMOs have driven up yield rates. This could lead to a more stable liquidity environment, but it also underscores the RBI’s proactive stance in shaping market dynamics.

Another significant aspect of the MPC’s discussions is the scrutiny of personal loans. The RBI has urged banks to reconsider their approach to personal loans, a product that has been growing at a faster rate than other loan categories. While this may raise concerns about access to personal loans for consumers, it’s essential to note that personal loans are typically unsecured and serve as a means to manage expenses rather than create assets. The risk associated with personal loans is relatively high, making it imperative for banks to maintain prudence in their lending practices.

Inflation has emerged as a central concern for the RBI, and Governor Shaktikanta Das has highlighted the issue. The recent surge in crude oil prices, driven by geopolitical tensions, has added a layer of complexity to India’s inflation outlook. Crude oil impacts not only direct fuel costs but also indirectly influences other prices through transportation costs. This external threat requires the RBI to remain vigilant and focused on inflation management.

Furthermore, the interest rate differential between India and other countries has shrunk, impacting long-term capital flows. While India continues to attract foreign investment, the narrowing interest rate gap could slow down these flows. Therefore, the RBI faces a delicate balancing act – controlling inflation while keeping interest rates attractive for foreign investors to stimulate sustainable economic growth.

In conclusion, the RBI’s decision to maintain the repo rate and its emphasis on OMOs, scrutiny of personal loans, and concerns about inflation reflect a cautious and vigilant approach to monetary policy. The central bank recognises the challenges posed by global economic developments and aims to strike a delicate balance between stimulating economic growth and maintaining stability. ]

Listen to the podcast.