Inflation below projections could open up policy space, India cenbank chief tells Business Standard

Reuters

6 hours ago

MUMBAI, June 17 (Reuters) - Inflation below the central bank's current projections could open up policy space, India's central bank chief Sanjay Malhotra told Business Standard newspaper in an interview, adding that incoming data will be watched closely to strike "the right growth-inflation balance".
The Reserve Bank of India's Monetary Policy Committee cut its policy repo rate by a steeper-than-expected 50 basis points earlier this month but changed its stance to 'neutral' from 'accommodative', prompting analysts to forecast the end of the rate-cutting cycle.
The change in stance "does not imply an immediate reversal in the policy cycle", said Malhotra in the interview published on Tuesday. "It is a reflection of how much more space it has to support growth. We will continue to watch the incoming data on inflation and growth and take a call," he said.
The central bank has maintained large surplus liquidity in the banking system since Malhotra took charge in December. This, he said, was to ensure that productive needs of the economy are met.
"We have robust regulations and effective supervision to ensure that credit is deployed prudentially," Malhotra said in response to a question on whether the surplus liquidity could fuel an asset price bubble.
The surplus liquidity has pushed India's weighted average call rate - the operative rate - below the policy repo rate.
The central bank will weigh the trade-off between allowing the call rate to trade closer to the floor of the interest rate corridor for better transmission of lower rates or pushing it back towards the repo rate, Malhotra said.
Liquidity fine-tuning operations such as the variable rate reverse repo (VRRR) auctions, which allow banks to park surplus liquidity with the central bank, do not impact durable liquidity, Malhotra said.
Last week, Reuters reported that the central bank would consider introducing VRRR auctions to align the call rate with the repo rate and use the cash reserve ratio (CRR) more frequently to adjust liquidity.
At its policy review, the RBI cut the CRR by 100 basis points to 3% in a surprise move.
"Higher the reserves, lower is the money supply available for credit and higher is the cost for banks," said Malhotra, adding that the CRR reduction should be seen in that context.
"It would not be correct to infer the CRR will be used for frequent liquidity management," he said.