RBI's policy review: Why this time is actually different

Unlike in the past, arguments in favour of and against a policy rate cut this June are finely balanced

- MADAN SABNAVIS

The credit policy to be presented in June will be quite different from earlier ones because there is a fine balance between both sides of the argument over a repo rate cut. This has rarely been the case in the past, when there was a compelling argument to either increase or decrease the policy rate or leave it unchanged. This unique situation can be attributed to the proactive approach of the Reserve Bank of India (RBI) in managing the environment related to interest rates.

Let us first look at the arguments that favour a rate cut. RBI made it clear in its last policy statement that a change in its stance to 'accommodative' is an indication of future rate cuts. Hence, the debate on whether such a stance meant there would be more liquidity rather than rate action is not relevant. Indeed, RBI has been supplying liquidity on a daily basis through overnight variable repo rate (VRR) auctions. So the tap has been kept open. This has been supplemented with aggressive open market operations (OMOs) in April and May. Around ₹2 trillion of funds have been provided through RBI purchases of government paper from banks. Hence, RBI has ensured that a precondition to rate cuts—surplus liquidity—has been met.