Economy needs support on growth side, RBI should first focus on liquidity, says Neelkanth Mishra

Neelkanth Mishra

Neelkanth Mishra, Chief Economist at Axis Bank, on February 18 said that economy needs support on the growth side and the Reserve Bank of India (RBI) to focus more on the liquidity.

“The economy needs support on the growth side now. My recommendation, you see this is where prescription and prediction need to differ. So, my prescription would be to focus on liquidity first,” Mishra said.

These comments came when the liquidity in the banking system is in huge deficit leading to uptick in the overnight rates in the market and due to this, the central bank has to inject liquidity heavily through various liquidity management tool such as variable rate repo (VRR) auction, open market operations (OMO) purchases, and USD/INR buy sell swap auction.

The RBI has injected around Rs 43.21 lakh crore in the banking system since the new governor Sanjay Malhotra took charge in December to navigate the challenging liquidity conditions in the past four months.

These funds were infused through a mix of options such as the normal variable rate repo (VRR) auctions worth Rs 16.38 lakh crore, daily VRR auctions of Rs 25.79 lakh crore, open market operation (OMO) purchase of government securities of Rs 60,020 crore and foreign currency (USD/INR) Buy Sell swap auction of approximately Rs 45,000 crore, according to the RBI data.

Mishra, on the rate cut front, said that further rate cut is recommended due to tight liquidity conditions, but more liquidity measures are required.

He added that the central bank has a lot of tools to address liquidity issues apart from those they are currently using such as long-term repo auction (LTRO) or targeted long-term repo auction (TLRO).

The RBI has in February monetary policy has cut rates, first in almost five years, a week after Finance Minister Nirmala Sitharaman presented the budget for FY26. The RBI has projected 6.7 percent GDP growth for the next fiscal year. The inflation projection for FY25 has remained unchanged at 4.8 percent.

RBI Governor Sanjay Malhotra said that the MPC has noted that inflation has declined. Supported by a favourable outlook on food prices and continuing transmission of past monetary policy actions, inflation is expected to further moderate in 2025-26, gradually aligning with the target.