Will RBI Cut Interest Rates Again? Governor Sanjay Malhotra’s Insights
India’s central bank may consider cutting interest rates further if inflation falls below its projection or growth comes under pressure, Reserve Bank of India (RBI) Governor Sanjay Malhotra has said.
In an interview with CNBC-TV18, Malhotra emphasized the importance of maintaining a balance between price stability and economic growth. He noted that the monetary policy committee will always factor in the evolving situation, the outlook, and then decide what the economy really needs.
“Certainly, the policy rates can be cut” if inflation falls below the central bank’s forecast or growth stays weak, Malhotra stated. Although price stability remains the central bank’s main goal, growth is also an important factor.
The RBI’s Dual Mandate
The RBI’s dual mandate of controlling inflation and promoting growth is well-documented. In recent months, the central bank has reduced its key rate significantly to support India’s slowing economy. Malhotra reiterated that one cannot say inflation is more important than growth; it’s always the mix of both factors.
“Both are equally important, and I would not say we are giving more weight to either number at this point,” he added. The RBI governor’s remarks come a day after June inflation fell to the lowest in more than six years, mainly due to slowing food prices.
Data-Dependent Approach
Malhotra emphasized that the central bank will remain data-dependent moving forward. There is an expectation that this year’s inflation may fall below the 3.7 per cent forecast. On India’s growth forecast, the governor stated that the 6.5 per cent growth projection for India is “aligned with our expectations,” though signals are mixed.
“The monsoon is favourable, we’re seeing optimism in consumer surveys, trade deals are ongoing,” Malhotra said. Since February, the central bank has reduced the repo rate by 100 basis points, including a half-point cut and a move toward a more hawkish neutral stance in the recent policy meeting.
Policy Framework and Liquidity Management
The RBI’s policy framework aims to align overnight borrowing costs with the benchmark repurchase rate, which is currently at 5.5 per cent. The framework seeks to achieve this by injecting or absorbing liquidity as necessary. Malhotra stated that the RBI’s policy framework is designed to ensure that the overnight borrowing costs are aligned with the benchmark repurchase rate.
Bank Ownership Rules and Foreign Investment
The RBI is reviewing its regulations regarding bank ownership, which could result in allowing foreign banks to hold larger stakes in domestic lenders. The central bank is considering whether to permit foreign banks to hold a 26 per cent ownership stake in local banks as a “general matter of policy.” At present, foreign investors, including portfolio investors, are allowed a 74 per cent stake in Indian banks. However, regulations limit a strategic foreign investor’s stake to 15 per cent.
The RBI plans to review and approve an investor’s request to increase their stake to 26 per cent. As the RBI simplifies the regulations, these uncertainties will be clarified, Malhotra said. When asked if the regulator would reconsider its long-standing concerns about allowing business conglomerates to own banks, the governor responded, “Conducting business and real economic activities within the same group presents a conflict of interest.”
