Surplus liquidity helps better transmission of rate cuts in bond, credit market, says RBI governor

RBI Governor Sanjay Malhotra

The surplus liquidity in the banking system has supported smoother transmission of the repo rate cut to both bond and credit markets, Reserve Bank of India governor Sanjay Malhotra said on August 6.

Between February and June, the weighted average lending rate (WALR) of commercial banks fell by 71 basis points for fresh rupee loans, of which 55 bps was directly due to the repo rate cut. For outstanding rupee loans, WALR declined by 39 bps, the governor said.

This was sharply higher than 26 bps transmission (domestic banks - 24 bps) and 18 bps (domestic banks - 16 bps) on weighted average lending rates on fresh and outstanding rupee loans of scheduled commercial banks, respectively, during February-May, RBI’s July bulletin said.

The weighted average domestic term deposit rate (WADTDR) on fresh deposits moderated by 87 bps during the period. The transmission to lending rates has been broad based across sectors.

The banking system has remained comfortably liquid, with the average daily surplus under the Liquidity Adjustment Facility (LAF) touching Rs 3 lakh crore since the June Monetary Policy Committee (MPC) meeting, he said.

This is nearly double the Rs 1.6 lakh crore surplus seen in the two months prior.

Malhotra attributed the ample liquidity to robust government spending and subdued credit demand.

He added that liquidity conditions would stay supportive, further aided by the implementation of the Cash Reserve Ratio (CRR) cut of 100 bps announced in the previous policy. The first leg of this cut is set to take effect in September.

The surplus liquidity has helped accelerate the transmission of policy rate cuts during the current easing cycle.

Malhotra said the RBI would remain “nimble and flexible” in its strategy to ensure adequate liquidity supports that credit needs and monetary policy transmission remains effective.