The Reserve Bank of India ( RBI) under governor Sanjay Malhotra isn't just easing borrowing costs but is also easing much of the prudential regulations that were stifling lending to the productive sectors as fuelling economic growth takes precedence over inflation where price pressures have been receding.
Credit Growth
In the first six months of his three-year tenure, Malhotra has cited easing prices to cut policy rates by half a percentage point, taken multi-pronged measures to turn a system-level fund deficit into a surplus, rolled back tighter norms for retail lending, restored original risk weights on financing of NBFCs and microfinanciers, and reversed curbs on the exposure of regulated entities to alternative investment funds (AIF).
Analysts believe these measures could quicken the credit markets that have been rather circumspect so far. To be sure, the credit growth has dropped to 12% in FY25, against 16% in the previous year.
"The RBI has adopted a growth-focused approach, especially given the current economic slowdown," said Anil Gupta, senior vice-president, financial sector ratings, ICRA. With growth slowing and inflation easing to a 67-month low of 3.16% in April, the pendulum has swung decidedly in favour of supporting growth.
An ET poll on Monday showed the economy likely expanded 6.3% in FY25, sharply lower than the 9.2% in FY24. The RBI's own growth forecast for FY26 is 6.5%, revised downward during the April monetary policy meeting from 6.7% earlier.
On Monday, the Reserve Bank of India proposed to ease regulations regarding banks' and NBFCs' investments in AIF, thereby facilitating entrepreneurs' access to alternative funding sources. In addition, the market expects the RBI to lower the policy rate by at least 25 basis points to 5.75% as inflation is below the RBI's 4% target.
Experts also believe the Reserve Bank of India will seek to inject more liquidity into the banking system. The Reserve Bank of India, in the past few years, has been tightening credit flows as years of easy money policies to fight the Covid logjam led to indiscriminate lending, causing a surge in defaults, especially among retail borrowers. The spurt in inflation-it hit an 8-year high in April 2022-also forced the RBI's hand.
Policy Action
Malhotra succeeded Shaktikanta Das, the 25th RBI governor and now principal secretary-2 to the prime minister. In his first policy announcement on February 9, Malhotra lowered the policy rate by 25 basis points, followed by another cut of the same magnitude in April.
One basis point is a hundredth of a percentage point.
Concurrently, the RBI infused funds through bond purchases to ease liquidity and dollar/rupee buy-sell swaps to stabilise the India currency that plummeted 3.7% between November 12 and February 10, 2025 Malhotra had hinted at a more lenient policy during a speech he delivered in March at a Financial Action Task Force event, bankers said. He emphasised the need for policymakers to ensure that measures aimed at securing financial systems against money laundering and terrorist financing do not overly hinder legitimate activities and investments.
Impact Seen
RBI's revised liquidity coverage ratio (LCR) norms are less stringent compared to the original draft.
It required banks to set aside a lower proportion of liquid securities against deposits raised through digital channels, a measure to protect against potential bank runs.
Economists say the revised norms allowed banks to deploy approximately ₹2.5 lakh crore to ₹3 lakh crore for lending. Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank, stated, "The cost of funds is being reduced, and the RBI is increasing the supply in the system through liquidity operations. When banks are flooded with liquidity, they'll pass that on to borrowers." The measures are beginning to show impact.
After a gap of about five years, home loans and small business loans linked to the repo rate saw a corresponding reduction in rates, while loans tied to the marginal cost of lending rate fell by 10 basis points.
Credit Growth
In the first six months of his three-year tenure, Malhotra has cited easing prices to cut policy rates by half a percentage point, taken multi-pronged measures to turn a system-level fund deficit into a surplus, rolled back tighter norms for retail lending, restored original risk weights on financing of NBFCs and microfinanciers, and reversed curbs on the exposure of regulated entities to alternative investment funds (AIF).
Analysts believe these measures could quicken the credit markets that have been rather circumspect so far. To be sure, the credit growth has dropped to 12% in FY25, against 16% in the previous year.
"The RBI has adopted a growth-focused approach, especially given the current economic slowdown," said Anil Gupta, senior vice-president, financial sector ratings, ICRA. With growth slowing and inflation easing to a 67-month low of 3.16% in April, the pendulum has swung decidedly in favour of supporting growth.
An ET poll on Monday showed the economy likely expanded 6.3% in FY25, sharply lower than the 9.2% in FY24. The RBI's own growth forecast for FY26 is 6.5%, revised downward during the April monetary policy meeting from 6.7% earlier.
On Monday, the Reserve Bank of India proposed to ease regulations regarding banks' and NBFCs' investments in AIF, thereby facilitating entrepreneurs' access to alternative funding sources. In addition, the market expects the RBI to lower the policy rate by at least 25 basis points to 5.75% as inflation is below the RBI's 4% target.
Experts also believe the Reserve Bank of India will seek to inject more liquidity into the banking system. The Reserve Bank of India, in the past few years, has been tightening credit flows as years of easy money policies to fight the Covid logjam led to indiscriminate lending, causing a surge in defaults, especially among retail borrowers. The spurt in inflation-it hit an 8-year high in April 2022-also forced the RBI's hand.
Policy Action
Malhotra succeeded Shaktikanta Das, the 25th RBI governor and now principal secretary-2 to the prime minister. In his first policy announcement on February 9, Malhotra lowered the policy rate by 25 basis points, followed by another cut of the same magnitude in April.
One basis point is a hundredth of a percentage point.
Concurrently, the RBI infused funds through bond purchases to ease liquidity and dollar/rupee buy-sell swaps to stabilise the India currency that plummeted 3.7% between November 12 and February 10, 2025 Malhotra had hinted at a more lenient policy during a speech he delivered in March at a Financial Action Task Force event, bankers said. He emphasised the need for policymakers to ensure that measures aimed at securing financial systems against money laundering and terrorist financing do not overly hinder legitimate activities and investments.
Impact Seen
RBI's revised liquidity coverage ratio (LCR) norms are less stringent compared to the original draft.
It required banks to set aside a lower proportion of liquid securities against deposits raised through digital channels, a measure to protect against potential bank runs.
Economists say the revised norms allowed banks to deploy approximately ₹2.5 lakh crore to ₹3 lakh crore for lending. Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank, stated, "The cost of funds is being reduced, and the RBI is increasing the supply in the system through liquidity operations. When banks are flooded with liquidity, they'll pass that on to borrowers." The measures are beginning to show impact.
After a gap of about five years, home loans and small business loans linked to the repo rate saw a corresponding reduction in rates, while loans tied to the marginal cost of lending rate fell by 10 basis points.
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