Context:
Since Sanjay Malhotra assumed charge as Governor of the RBI in December, the Reserve Bank of India has shifted a little more on the accommodative policy stance to hold support towards the banking and economy, which is facing a slowdown in growth itself.
Key Measures Taken by RBI
Interest Rate & Liquidity Measures
- First rate cut in five years
- The Monetary Policy Committee (MPC) cut the repo rate by 25 basis points (bps) in February, which marks the beginning of a move towards a less restrictive monetary policy.
- Frequent liquidity injections
- To ease the tightness within the banking system, RBI undertook:
- Open Market Operations (OMO) auctions (for the first time in years)
- USD/INR buy sell swap auctions
- Daily Variable Rate Repo (VRR) auctions
Postponement of Regulatory Norms Implementation
- To provide relief to banks, RBI has delayed a number of key regulations, like:
- Liquidity Coverage Ratio (LCR) norms
- Expected Credit Loss (ECL) framework
- Project finance regulations
Catalysts for Banking & NBFC Sector
- Relaxed risk weightings on loans to NBFCs & Microfinance Institutions (MFIs) from 125% to 100% → Injecting ₹40,000 crore into banking (~₹4 trillion in loanable funds).
- Removed regulatory restrictions on multiple financial entities, including:
- Kotak Mahindra Bank
- Arohan Financial Services
- Asirvad Microfinance
- DMI Finance
The “cease and desist” order still remains on Paytm Payments Bank.
Economic Context and Impact
- Addressing Growth Slowdown
- India’s GDP growth fella at 5.4% (seven quarter low) in July September.
- Global uncertainties & rupee depreciation, leading to RBI action intervention in forex markets which struck liquidity.
- Liquidity deficit soared up to ₹3 trillion in January, highest since April 2010.
Market & Analyst Reactions
- Macquarie Research: The RBI action becomes balance of growth support & regulatory flexibility.
- Nomura Report: Coordinated policy approach finally adopted by India but more easing on the cards.
- Emkay Research: Recent policy measures seem credit positive for banks in the medium to long term.
Under Governor Sanjay Malhotra, RBI has adopted a policy growth oriented shift towards easing liquidity and delaying certain regulatory measures. Although analysts cheer the steps, they also seek the necessity for continued policy easing in order to maintain momentum in the economy.
Source: BS
