RBI, FinMin to work in close-coordination keeping growth in mind, says FM Sitharaman

Finance Minister Nirmala Sitharaman

In the coming days, the Reserve Bank of India (RBI) and the central government will work in a well-coordinated manner keeping growth impulses in mind, Finance Minister Nirmala Sitharaman said on February 8.

"Whether it is inflation or growth, monetary policy and fiscal policy are like two tyres of a car. By working together and in coordination, our economy and public will gain from it. That’s why I think whether it’s inflation or growth, particularly plugs for growth, it is appropriate for the RBI and the government to have coordination on this," she said while addressing a briefing in New Delhi.

Sitharaman added that while the two institutions work in tandem, neither of them encroach on each other's territories.

"I don’t think that has existed in the last 10 years and now I don’t see that existing even in the future. There has been good coordination between the RBI and the government," the finance minister added.

Sitharaman's comments come at a time when India's GDP growth is seen at a four-year low of 6.4 percent in the current financial year, a significant fall from the 8.2-percent figure in 2023-24.

While, the central bank's primary responsibility is anchoring inflation, it also includes considerations on growth for its decision making.

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on February 7 unanimously decided to lower the repo rate by 25 basis points, the first in almost five years and a week after Sitharaman presented her eighth consecutive Budget for FY26.

The RBI has projected 6.7-percent GDP growth for the next fiscal year. The inflation projection for FY25 remained unchanged at 4.8 percent.

The RBI had increased the repo rate by 250 bps over May 2022 to February 2023 and kept it steady since April 2023 at 6.5 percent in order to check inflation and bring it within its medium-term target of 4 percent.

Rupee fall

Weighing in on the fall in rupee, RBI Governor Sanjay Malhotra, who was addressing the briefing along with Sitharaman, said that the central bank will be watchful of any depreciation in the currency that leads to inflation.

"Most of the rupee's depreciation is due to Trump-related tariff announcements and global uncertainties. So hopefully that should settle down and help us with downward movement on inflation," Malhotra added.

Malhotra is referring to the escalation in global uncertainties leading to a sharper fall in rupee, following US President Donald Trump's decision to slap higher duties on three of its largest trading partners -- Canada, Mexico, and China.

The Indian rupee has seen record lows in the past few days due to foreign fund outflows and rising dollar demand from oil importers, amid weak appetite in global markets.

On concerns around the rupee weakening further, the Governor said that there is no change in the RBI's approach on INR.

"We don't target a price level or band for rupee. We only step in when there is excessive volatility...We trust our market's efficiency and depend on them to decide on the level of rupee," he added.

Coming to liquidity, Malhotra said that going forward the RBI will be "nimble, agile and watchful" of the banking system's requirement.

Liquidity in the banking system has been under stress in the last few weeks due to tax outflows, heavy intervention by the RBI in the forex market to sell dollars, and slower pace of spending by the government.

"We have a number of instruments at our hands to control and manage liquidity. We will use them, we have the OMO (open market operations), buy/sell swaps of forex, we have various other instruments, we have LAF, VRR, and we are using all of these measures to provide sufficient liquidity, so we need not be worried on that account," Malhotra added.

To support liquidity, the central bank on January 27 rolled out a slew of measures such as open market operations (OMO) purchases, USD/INR Buy Sell swap auction and daily variable rate repo (VRR).