Sanjay Malhotra Signals Potential Rate Cuts as New RBI Governor

Monetary Policy Shift Under New Leadership

Mumbai: Following two consecutive 25 basis points cuts, Sanjay Malhotra, the newly appointed Governor of the Reserve Bank of India, indicated a possible further reduction in the key policy rate. This shift to an 'accommodative' monetary stance from a 'neutral' one could lead to lower EMIs for borrowers.

The upcoming bi-monthly monetary policy announcement is set for June 6.

During the April monetary policy reveal after a Monetary Policy Committee (MPC) meeting, Governor Malhotra explained that the change in stance reflects the anticipated direction of policy rates.

"With this shift from 'neutral' to 'accommodative', the MPC is now considering either maintaining the current rate or implementing a cut, barring any unforeseen circumstances," he stated.

He emphasized that this stance should not be directly linked to liquidity conditions.

Discussing the monetary policy framework, Malhotra noted that globally, stances are categorized as accommodative, neutral, or tightening.

An accommodative approach aims to stimulate economic growth through lower interest rates, while tightening involves raising rates to control inflation and reduce spending.

A neutral stance, he added, indicates an economy that does not require stimulation or demand control, allowing flexibility based on changing economic conditions.

In February, the MPC reduced the repo rate by 25 basis points to 6.25 percent, marking the first cut since May 2020 and the first adjustment in two and a half years.

Governor Malhotra reiterated that while managing liquidity is crucial for monetary policy, it serves as an operational tool for various purposes, including policy rate adjustments.

"Changes in policy rates impact liquidity management, but our stance primarily guides policy rates without directly influencing liquidity management," he clarified.

In January 2025, system liquidity was in deficit, with a net injection under the liquidity adjustment facility (LAF) reaching Rs 3.1 lakh crore on January 23.

However, following measures that injected approximately Rs 6.9 lakh crore, the liquidity deficit decreased from February to March 2025, eventually turning into a surplus by March 29, according to the governor.

He noted that as government spending increased in late March, system liquidity improved, reaching a surplus of Rs 1.5 lakh crore by April 7, 2025.

Reflecting these changes, the weighted average call rate (WACR) softened and remained close to the repo rate since the last policy meeting.

The spreads between three-month commercial paper and three-month certificate of deposit rates over the 91-day Treasury bill rate have also eased since mid-March, indicating better liquidity conditions.

The governor assured that the Reserve Bank is dedicated to ensuring sufficient system liquidity.

He concluded by stating that the RBI will continue to monitor liquidity and financial market conditions closely, taking proactive measures to maintain adequate liquidity.