MPC Analysis | RBI Governor Sanjay Malhotra unpacks all the goodies in one go to spur growth

Sanjay Malhotra, Governor, Reserve Bank of India

It was a surprisingly packed 55th Monetary Policy that was delivered by the Reserve Bank of India Governor Sanjay Malhotra. He unlocked the first goodie in the form of a 50 basis point (bps) repo rate cut and then came the 100 bps reduction in cash reserve ratio (CRR).

Both these cuts were higher compared to the expectation of a 25 bps repo rate cut and a possible 50 bps CRR cut, timing of which was not anticipated in June 6 policy.

By delivering the two surprises, the RBI Governor has passed the baton to the banking system, Corporate India and the government to spur growth. “MPC also felt that under present circumstances there is limited room to support growth,” he said while spelling out the rationale for front loading the rate cut in his monetary policy committee (MPC) speech.

What makes it more interesting is the quick change in stance, from accommodative back to neutral, which suggests that a monetary policy-related action to spur economic growth is unlikely.

To be sure, it was only in the April MPC that the stance was reversed from neutral to accommodative.

Shifting back to the neutral gear is a signal from the RBI that whatever was within the remit of the MPC to done to support growth has all been unlocked. It is now time to see how these efforts translates to action.

What this also suggests is that there could be a long pause on repo rate action till the 100 bps cut from February to June translates into some gains for borrowers.

In other words, till our home loans become cheaper and India Inc can borrow at more affordable rates, terminal benchmark rate could be 5.5 percent. The change in stance also comes at the back of the governor expressing his concerns over transmission of repo cuts which have taken place so far. “We are yet to see perceptible transmission of rates in the credit market,” he said in his MPC speech.

For banks, handling out the rate cut along with a 100 bps CRR reduction is theoretically a bonanza. Expected to unlock Rs 2.5 lakh crore of primary liquidity into the system from September this year, the CRR cut gives very little excuses for banks not to pass on the benefit of lower repo rate.

In December last year, when a 50 bps CRR reduction happened and a a little over Rs one lakh crore of liquidity was infused into the banking system, the move had little advantage as the net liquidity in the banking system was at a whooping deficit.

That’s not the case anymore, thanks to over Rs 3 lakh crore of durable liquidity infusion since January 2025. Therefore, this time around, the Rs 2.5 lakh crore of liquidity infusion through a CRR cut may have tangible benefit to the system.

Yet, much of the upside of today policy action will depend on two factors – demand for loans and cost of deposits.

Fortnight after fortnight, sectoral credit deployment data published by the RBI indicates that credit growth of bank has hit a new low. Recent credit growth prints at about seven percent is a cause of concern and indicates that there is not much demand for bank loans. That credit consumption by India Inc is also at an all-time low is equally depressing.

The question then is, whether a reduction in rates will reverse the anaemic demand for credit. Cost of credit under normal circumstances, whether to an individual’s wallet or to India Inc is about 7 – 9 percent of total operating expenses on an annualized basis.

With affordability not improving, can low cost of debt really turn the fortunes for banks?

The joker in the pack is, however, deposits. Interest rates of over 50 percent of bank loans is dependent on cost of deposits.

Unless deposit rates reduce, banks will not be in a position to reduce interest rates on these loans.

Unfortunately, deposit rates tale at least nine months to be repriced downwards and the extent to which a downward revision can be made is unclear given that the fight for deposits is still being furiously fought at bank branches.

Therefore, the question which still prevails is whether today’s measures can boost growth in the next six months.

The fact that the RBI has not altered its GDP estimates upwards indicates that growth may well be a protracted outcome and today’s enthusiasm expressed by  the Nifty Bank index, which touched an all-time high of 56,579 points, could be a premature party thrown to cheer RBI’s double bonanza.