Rate cuts don't become effective if liquidity is tight, says CRISIL Ratings' Dharmakirti Joshi

Rate cuts don't become effective if liquidity is tight, says CRISIL Ratings' Dharmakirti Joshi

CRISIL Ratings chief economist Dharmakirti Joshi on March 6 said that the rate cuts by the Reserve Bank of India (RBI) don't become effective if the liquidity conditions in the banking system are tight.

He added that managing the liquidity along with the rate cut will allow the rates to pass on to the end consumer.

In the last few months, amid the tight liquidity conditions in the banking system, the central bank has announced slew of measures to support it. While doing this, the RBI has also cut the repo rate by 25 basis points (Bps) in February monetary policy, to support slowing growth.

This was done after holding the repo rate at 6.5 percent for 11 consecutive policies. The RBI increased the repo rate by 250 basis points from May 2022 to February 2023. Since April 2023, the repo rate has been steady at 6.5 percent, in order to keep a check on the inflation rate and bring it to the medium-term target of 4 percent.

Further, CRSIL ratings in their report expect that the central bank will 50-75 bps in the financial year 2025-26, to support consumption and lower borrowing costs.

Lower interest rates are expected to mildly support consumption as these will gradually get transmitted to other interest rates in the economy, thereby lowering borrowing costs, report added.

Banking system liquidity has been tight since mid-December due to slower government spending, interventions in the foreign exchange market by the RBI, and heavy selling by foreign portfolio investors in Indian equities.

To support liquidity in the banking system, the RBI has since late 2024 infused around Rs 3 lakh crore worth of durable liquidity, tapping a combination of VRR or variable rate repo auctions, swaps and OMOs.

As per data collected from the RBI website, it has infused Rs 51.28 lakh crore through daily VRR auction, normal VRR auctions and OMO purchases. On top of this, the central bank infused around Rs 1.30 lakh crore through the dollar-rupee swap auction.

The total liquidity infusion was in gross terms, most of which has been reversed back to the RBI due to maturity on a later date.