Home >Markets >Mark To Market >RBI finally realizes it is bigger than its policy rate-setting committee

The job of a central bank is bigger than chasing one macroeconomic target. The Reserve Bank of India (RBI) seems to have finally realized this.

“The MPC (monetary policy committee) may have been discounted, but do not discount the RBI," said governor Shaktikanta Das at a press briefing after the policy meeting on Thursday.

The central bank is bound by law to keep headline inflation in the band of 2-6%, failing which it would be asked to explain itself to India’s elected lawmakers. Inflation shot past this target in December, rising to 7.5%.

To that extent, RBI’s six-member rate-setting committee has been careful not to be too accommodative to growth concerns. However, nothing stopped Das from using other measures that are essentially outside the ambit of MPC.

Graphic by Naveen Kumar Saini/Mint
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Graphic by Naveen Kumar Saini/Mint

To soften the blow of an absent rate cut on an economy struggling to find its mojo, the RBI governor opted to give a slew of measures aimed at pushing banks to lend more.

Banks need not set aside deposits to maintain a cash reserve ratio (CRR) if they are lending to housing, auto, and micro, small and medium enterprises (MSMEs). CRR is a regulatory measure wherein banks have to set aside a portion of their deposits with RBI. Now, if they lend to housing or MSMEs, they don’t have to do it to the extent of their loans to these segments. Analysts at Edelweiss Securities Ltd expect a benefit of 25-30 basis points for borrowers of home, auto, and small business loans after these measures.

It only gets better from here. The central bank has guaranteed long-term liquidity of up to 1 trillion at a cheap price through long-term repos of one year and three years to banks. Enterprising banks would opt to borrow from RBI to lend rather than complain about what they have to shell out to attract deposits.

The liquidity measures are reminiscent of the European Central Bank’s (ECB’s) unequivocal promise of funds to the banking system. No wonder some in the market attributed former ECB head Mario Draghi’s penchant to please the markets, to Das. “Today, the RBI has emulated the ECB action by introducing long-term repo," said Arvind Chari, head of fixed income and alternatives at Quantum Advisors Pvt. Ltd.

The markets loved the assurances on liquidity, which is evident from the fall in bond yields across the curve.

As for MPC, it made all the right noises on inflation and growth. The RBI governor stressed that inflation may have peaked in the current quarter. While the increase in inflation forecast may indicate no room for rate cuts, Das was quick to say otherwise.

As policies go, Thursday’s statement was dovish, with enough sprinklings of a vigil on inflation. The optics of retail inflation may have tied MPC’s hands, but RBI showed it has its own hands to spare for growth.

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