If the Reserve Bank of India’s (RBI) goal is to ease financial conditions, which will consequently lead to higher credit offtake and support growth, it should focus on alleviating the persistent tight liquidity conditions rather than cutting the policy rate, said Neelkanth Mishra, chief economist, Axis Bank.

       “If the objective is to ease financial conditions and support growth, which is what the Monetary Policy Committee (MPC) has stated, my prescription will be to focus on liquidity first, because at this stage, cutting rates is not helping,” Mishra, who is also a part-time member of the Prime Minister’s Economic Advisory Council.

       “A 25 basis points (bps) rate cut will see some immediate transmission, but if the objective is to trigger more lending, the new loans will not get done at lower rates because the marginal cost of funds remains the same,” Mishra said on Tuesday.

       His comments come at a time when banking system liquidity has been in deficit for some time, leading to a rise in overnight rates. The net liquidity in the banking system was in a deficit of ？1.8 trillion on Sunday, latest data from the RBI showed. The RBI’s active intervention in the foreign exchange market to avoid a sharp decline in the rupee against the dollar has weighed on banking system liquidity.

       The RBI has been injecting liquidity into the system through various measures, including variable rate repo (VRR) auctions, open market operations (OMOs), and USD/INR buy-sell swap auctions.

       Also Read

       Premium

       Weighted moves: RBI's shock therapy restores stability to the forex market

       RBI launches 'RBIDATA' app to offer access to economic, financial data

       Premium

       Corporate bond yields continue to harden despite RBI's repo rate cut

       Govt, RBI working together to control inflation and drive growth: FM

       Premium

       Entire claims settled by deposit insurer was for co-op banks in FY24

       According to Mishra, among the steps the RBI can take to inject durable liquidity are: cutting the cash reserve ratio (CRR), reducing the incremental cash reserve ratio (ICRR), conducting FX buy-sell swaps, OMOs, or long-term repo operations (LTROs).

       “In my view, given that the last CRR cut was in December, it is too early to cut CRR again because it acts with a lag. An ICRR cut can work, given that there is a large RBI dividend that will come up. LTROs have been used by the RBI in the past, and in economies like Europe, they have worked more effectively than OMOs. It is somewhat untested in India,” he said.

       In its February meeting, the six-member MPC reduced the policy repo rate by 25 bps to 6.25 per cent, against the backdrop of easing inflation and slowing economic growth, marking the first interest rate reduction by the central bank in almost five years.

       However, experts believe the RBI’s rate cut may not be enough to nudge banks to lend more at a time when banking system liquidity is in deficit.

       On the possibility of more rate cuts, Mishra said: “There are still worrying signs of inflation. I don’t think that battle has been won yet. And, if you think 125 bps is the neutral real rate, and growth is 6.5–7 per cent, you can live with a 5.75 per cent repo rate. At this stage, with this kind of liquidity, this might not be effective. I would not recommend doing that.”

       More From This Section

       Rupee declines 10 paise to close at 86.98 against dollar amid rise in crude

       Rupee falls 8 paise to 86.96 against US dollar in early trade today

       Deposit insurance cover may increase from Rs 5 lakh: DFS secy Nagaraju

       India delivering 'good returns': FM Nirmala Sitharaman on FII selloff

       Experts intrigued by inclusion of electoral bonds in new Income-Tax Bill