RBI Sends Mixed Monetary Signals, Raising Questions About Policy Clarity

By siliconindia  |  Thursday, 12 June 2025, 09:40:02 AM IST

RBI Sends Mixed Monetary Signals, Raising Questions About Policy Clarity
  • RBI’s surprise rate cut and liquidity boost clash with its shift to a neutral stance, creating policy confusion.
  • Despite injecting over Rs 9.5 trillion, loan growth remains sluggish, with banks parking funds instead of lending.
  • Mixed signals from the central bank have triggered bond market volatility and investor uncertainty.
The Reserve Bank of India (RBI), under the leadership of its new Governor Sanjay Malhotra, is sending mixed messages to markets and investors, stirring confusion around the central bank’s monetary policy direction. With aggressive and, at times, contradictory moves aimed at boosting economic activity, analysts warn that the central bank’s approach could be undermining the effectiveness of its policies.
In a surprise move last week, the RBI announced a sharper-than-expected interest rate cut and unveiled a liquidity infusion plan aimed at reviving credit growth and stimulating the economy. At the same time, however, it shifted its policy stance back to 'neutral' after having adopted an 'accommodative' tone in the previous meeting. This return to a more cautious outlook is typically interpreted as a signal that further rate cuts are unlikely in the near term.
Governor Malhotra, who has now held office for six months, justified the decisions by stating that there is 'very limited space to support growth' through further monetary easing. The conflicting actions simultaneously loosening and tightening policy signals have left market participants puzzled.
“This lack of clarity could potentially hinder the effective transmission of interest rate cuts, thereby undermining the policy’s objectives”, said Priyanka Kishore, principal economist at Asia Decoded Pte Ltd. in Singapore.
The RBI’s actions come in response to slowing economic growth. India’s GDP expanded by just 6.5% in the last fiscal year falling short of the 8% growth rate the government is targeting to meet its ambitious economic and employment goals. Despite three rate cuts since Malhotra took over, banks have remained cautious, with sluggish credit demand prompting them to park excess funds with the central bank rather than lend them out.
Further complicating the picture is the RBI’s recent decision to reduce the cash reserve ratio (CRR) in phases beginning September. This move will inject an additional Rs 2.5 trillion ($29.2 billion) into the banking system on top of the record Rs 9.5 trillion already infused since January.
Yet, just days later, the RBI unexpectedly announced it would discontinue its daily liquidity injections a step that many interpreted as a signal that it may soon start withdrawing excess cash from the system.
“With banking system liquidity ample, the need to use a blunt tool like the CRR is unclear”, remarked Sonal Varma, Chief Economist for Asia ex-Japan at Nomura Holdings Ltd., expressing concerns over the policy inconsistency.
Bond markets responded swiftly to the ambiguity. The volatility triggered by the central bank's announcements prompted two state-owned companies to shelve plans for issuing rupee-denominated bonds. Yields on top-rated corporate debt with three- and five-year maturities spiked by eight and nine basis points respectively, reversing the earlier decline seen after the liquidity injection announcement.
Adding to the unease is the central bank’s struggle to revive lending. RBI data reveals that, as of June 10, banks had parked Rs 2.7 trillion in the central bank’s overnight facility due to lackluster demand for loans. Loan growth has now slipped below 10% its lowest level in over three years despite the ongoing rate cuts and liquidity support.
Analysts argue that this suggests structural issues within the financial system or weak business confidence, rather than a shortage of liquidity or high interest rates.
The rate on secured money market instruments has also been pulled significantly below the RBI’s policy rate of 5.5%, and in some instances, even beneath the central bank’s interest rate floor indicating a disconnect between RBI’s benchmark rates and prevailing market conditions.
Economists like A. Prasanna of ICICI Securities Primary Dealership Ltd. observe that the central bank under Malhotra is employing a new form of forward guidance by using the policy stance to signal future intentions around interest rates. Previously, the stance served as an umbrella view covering liquidity, monetary conditions, and credit flow.
“We are not used to such guidance, so it may be confusing for market participants, depending on their expectations from policy,” Prasanna noted.
In contrast to his predecessors, Malhotra’s approach appears more experimental, perhaps reflective of the economic challenges he faces. However, this has led to growing concerns about the clarity and consistency of the RBI’s communication.
With inflation relatively under control and growth faltering, many expected the RBI to adopt a more dovish and predictable approach. Instead, the recent policy actions have added uncertainty at a time when confidence among consumers, businesses, and investors is already fragile.
Analysts warn that unless the RBI adopts a more coherent and clearly communicated policy strategy, it risks diminishing the credibility of its interventions and weakening monetary transmission. The conflicting signals could lead to prolonged market volatility, further delay investment decisions, and slow the pace of economic recovery.
For now, observers await the RBI’s next policy meeting for clarity on its evolving strategy under Malhotra. Whether the current approach is a calculated long-term shift or merely teething trouble under new leadership remains to be seen.

ON THE DECK

Top Banner