He came, he spoke, and he was clear. Reserve Bank of India’s new Governor Sanjay Malhotra’s first monetary policy statement signalled business as usual with a clear intent. He articulated plans to refine the flexible inflation targeting framework by enhancing the central bank’s data forecasting capabilities, aiming to avoid inflation miscalculations. This policy announcement was keenly awaited and broadly welcomed.

Easing Regulatory Pressures

Malhotra assured that the RBI, in its role as the banking regulator, would strengthen and streamline prudential regulations, balancing financial stability with efficiency. This suggests a consultative approach, giving banks sufficient time to adapt to tighter regulations. The first indication of this was postponing the stricter liquidity coverage ratio (LCR) norms by a year to March 2026, offering relief to banks grappling with deposit mobilisation in tight liquidity conditions.

Efficiency and Market Conduct

While consultative on regulation, Malhotra hinted at pushing banks towards efficiency. He noted banks’ reluctance to engage in inter-bank lending through the call money market, preferring to borrow from the RBI’s liquidity facilities. This subtle nudge towards market participation suggests a focus on optimising market mechanisms. The RBI also plans to issue guidelines to address mis-selling of financial products, indicating a commitment to consumer protection and fair market practices.

Growth Trumps Inflation Fears

Markets noted Malhotra’s emphasis on the flexibility within the inflation targeting framework, a departure from the RBI’s past rigidity. The 2-6 percent inflation band provides room for the MPC and RBI to address growth concerns, a flexibility Malhotra seems ready to utilise. Despite this growth orientation, he reassured that the central bank remains vigilant on inflation. The repo rate cut of 25 basis points was justified by slowing growth and easing inflation, making “a less restrictive monetary policy appropriate”.

Markets’ Lukewarm Reaction

As anticipated, the rate cut and the growth-focused shift were largely priced in by the market. This could explain the muted response in both equity and bond markets post-policy. The cohesive communication of the MPC statement, possibly influenced by the new governor, is a notable positive. While projections were only marginally adjusted from the December policy, the unanimous vote for a rate cut, despite previous divisions on inflation risks, indicates Malhotra’s ability to build consensus and steer the MPC towards prioritising growth.

The rate cut, while growth-supportive, might pose challenges for the exchange rate, especially with global headwinds like potential tariff threats. Malhotra acknowledged these global uncertainties, opting to manage the exchange rate, a potentially demanding task with liquidity implications. Market expectations are now high for open market operations to efficiently manage liquidity.

Malhotra’s communication style, devoid of grand pronouncements, favours simplicity and directness. This initial policy statement suggests a governor focused on efficiency and clear communication.

What next for the markets? While the rate cut is unlikely to trigger a dramatic rally immediately, it sets the stage for a more growth-oriented environment. The focus will now shift to how effectively the RBI manages liquidity and navigates global economic uncertainties to sustain this growth trajectory.

Image Courtesy: X (Numismatics Collections)