The Monetary Policy Committee has unanimously decided to cut the policy rate by 0.25 per cent, bringing it down to 6 per cent, while also shifting its stance from neutral to accommodative. Importantly, Reserve Bank of India Governor Sanjay Malhotra has clearly emphasised that the accommodative stance is intended as a signal for interest rates and should not be directly interpreted as a reflection of prevailing liquidity conditions. By separating the direction of the policy rate from liquidity signals, the Central bank aims to maintain flexibility in navigating short-term rates to ensure financial market stability.
The signalling of the monetary policy stance reflects the Central bank’s intent and its long-term outlook on macroeconomic fundamentals. In contrast, the strategy — particularly with regard to liquidity management — is inherently short-term and tactical, aimed at complementing the broader policy stance. Liquidity operations are conducted within a defined operational framework that is shaped by the prevailing economic environment.
However, in the short run, the tool used in liquidity strategy may diverge from the broader stance without undermining the overarching objectives. As the Governor clearly articulated, an “accommodative” stance implies that MPC is considering only two options: maintaining the status quo or cutting rates. The tool being used to pursue liquidity strategy can still vary, based on evolving conditions. For instance, sustained and sizeable foreign portfolio investment inflows may necessitate sterilisation, often through tools such as open market operation (OMO) sales. And OMO sale, in general, is perceived as a liquidity tighteningmeasure. Similarly, liquidity could be tightened to ensure that short-term rates serve as a guardrail against excessive volatility in the rupee.
While these actions may seem contradictory with the accommodative stance at first glance, they are, in fact, fully consistent with the Central bank’s mandate: safeguarding financial market stability and preserving price stability in the broader economy.
Daily adjustment
A shift in the RBI’s liquidity operations began in January, with the reintroduction of the daily liquidity adjustment facility auctions. The Central bank will continue to intervene through variable rate repo (VRR) or variable rate reverse repo (VRRR), as and when required. Under this framework, the RBI now conducts variable rate auctions with amounts announced on a T-1 basis. This marks a departure from the earlier practice of fortnightly term repo auctions, which was built on two key assumptions: first, cash reserve ratio (CRR) requirements are maintained on a fortnightly basis, and second, banks would proactively manage their short-term liquidity needs on an ex-ante basis, contributing to the development of a more efficient term money market.
Banks now have the assurance of daily access to liquidity — albeit not at a fixed rate/repo rate.
This shift in market microstructure effectively addresses the inter-temporal dilemma banks previously faced: whether to borrow through term money auctions or turn to the interbank market or through the more expensive daily ‘marginal standing facility’.
In essence, this tactical move eases the pressure on daily liquidity management and creates a more supportive environment for softer interest rates.
Liquidity strategy
Now to understand the recent liquidity strategy and action by the RBI. According to the monetary policy report, there has been a significant liquidity drawdown of ₹8.2 lakh crore, driven by two autonomous factors: net forex sales amounting to ₹5.8 lakh crore and a rise in currency in circulation by ₹2.4 lakh crore. In response, the RBI injected liquidity through multiple channels — ₹2.84 lakh crore via OMO purchases and ₹2.2 lakh crore through long-term forex buy/sell swaps — totalling about ₹5 lakh crore. The shortfall was managed through a drawdown of government cash balances and term repo auctions. Additionally, the RBI announced ₹1.2 lakh crore in OMO purchases for April 2025.
In essence, this largescale liquidity infusion is aimed at offsetting the autonomous outflows, rather than creating a surplus like the ultra-loose liquidity conditions seen during the pandemic. This signals a calibrated and nimble approach, maintaining adequate liquidity to support financial stability without flooding the system — particularly crucial in the current environment of heightened external volatility and the need for caution in the domestic unsecured lending space.
Now the question is how credit and deposit will shape up in FY26. An elevated loan-to-deposit ratio (LDR) and current liquidity coverage ratio (LCR) would continue to constrain banks’ loan growth and converge them towards deposit growth. To ensure healthy transmission, banking system liquidity needs to be in surplus. This would ease the pressure on deposit rates and lower the marginal cost of funds-based lending rates.
Ind-Ra estimates system deposit growth of 12-13 per cent year-on-year for FY26, like in FY25, with competitive intensity for garnering low-cost ‘current account, savings account’ deposits. With system LDR being highest over the past five years at 80 per cent and term deposit rates near peak or peaking, the reliance on raising infrastructure bonds is likely to continue in the near term. Further, the reliance on bulk deposits is likely to increase if the growth in granular deposits remains constrained.
In terms of credit demand, broad-based capital expenditure has been lacking for some time; and, amid heightened uncertainties, it is unlikely to improve. However, sectors such as iron and steel, cement, data centres, logistics and renewables are showing healthy capex but given their modular nature, the reliance on debt is spread out.
(The writer is Director, India Ratings & Research — a Fitch group company. Views are personal)
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Published on April 13, 2025