The financial system is “hugely surplus” with liquidity and this would facilitate the better transmission of rate cuts implemented by the Reserve Bank of India (RBI), according to its Governor Shaktikanta Das.
“You have to keep in mind the fact that from June 1 onwards, the system is more than adequately surplus in liquidity,” Mr. Das said at a press conference on Monday after a post-Budget meeting of the RBI Board with Union Finance Minister Nirmala Sitharaman.
“Today as we speak, the system liquidity is hugely surplus and we have also announced a liquidity backstop for banks to implement the NBFC [Non Banking Financial Company] package which the Finance Minister announced in the Budget. When there is adequate liquidity, it always facilitates better transmission. So I would expect in the coming weeks and months that we would see better transmission taking place,” he said.
A positive development taking place recently was that banks were taking a shorter time to transmit the repo rate cuts implemented by the RBI.
“In the last Monetary Policy Committee meeting, by that time 50 basis point repo rate cut had been announced, and out of this, 21 basis points transmitted. One positive thing that is happening is that earlier it used to take six months for the transmission to happen. Now it is taking a much shorter period of 2-3 months,” Mr. Das said.
In the last meeting, the RBI announced a further repo rate cut of 25 basis points, which took the total cut to 75 basis points over three consecutive meetings. The RBI was collecting the data on the transmission of the latest rate cut, he stated.
It was a very positive development that the government had cut its fiscal deficit target for financial year 2019-20 to 3.3% from the earlier target of 3.4%. “The RBI will always be happy when the fiscal deficit is maintained,” Mr. Das said. “And this time the fiscal deficit has been improved actually to 3.3%. The RBI will be happy mainly because it completely limits the so-called crowding out effect, which is very positive because it leaves more space for meeting the private sector borrowing.”