RBI's New Approach under Governor Sanjay Malhotra
Since taking charge, Sanjay Malhotra has demonstrated an innovative approach to the Reserve Bank of India's operations, moving away from traditional practices.
Policy Direction
- Prioritizing growth over inflation by cutting policy rates and adopting an "accommodative" stance.
- Implementing an aggressive foreign exchange intervention strategy.
- Relaxing liquidity norms and extending deadlines for the liquidity coverage ratio.
Liquidity Management and Communication
The RBI's approach to liquidity management has evolved, marked by significant operations in open market operations (OMOs):
- Conducted OMOs worth ₹2.25 trillion in April and May, aiming to infuse liquidity by purchasing bonds.
- Last financial year saw an infusion of ₹2.5 trillion from January to March.
- Gaura Sen Gupta from IDFC First Bank noted the aggressive pace of OMOs, likening it to pandemic measures.
Innovations in OMO Communication
Changes in OMO communication include:
- Announcing an OMO calendar, a novel practice outside the Covid-19 period.
- This calendar indicates the RBI's ability to forecast liquidity for a month in advance.
- Adjustments in OMO sizes reflect the RBI's assessment of liquidity requirements.
Motivations Behind OMO Strategies
- Earlier, OMOs were triggered by overnight rate spikes; current strategies focus on liquidity tightness.
- The first OMO in January followed a liquidity deficit beyond ₹3 trillion, despite stable overnight rates.
Transmission of Rate Cuts
- RBI now targets liquidity levels to ensure effective rate cut transmission, a shift from focusing solely on overnight rates.
- April's OMO calendar aims to accelerate monetary transmission, as rate adjustments typically take two quarters to reflect in lending and deposit rates.
Reasons for Liquidity Infusion
- The need for liquidity infusion is partly due to substantial short positions in the RBI's forward books, recorded at $88.75 billion by February's end.
- To facilitate rate cut transmission, the RBI aims to maintain system liquidity between 1% and 1.2% of net demand and time liabilities.
