India’s central bank, led by new Governor Sanjay Malhotra, is confusing investors and markets with mixed signals about its monetary policy. While it’s taking aggressive steps to stimulate the economy, some of its decisions seem to contradict each other.
Last week, the Reserve Bank of India (RBI) surprised analysts by cutting interest rates more than expected and announcing a major cash injection for banks to encourage lending and boost growth. However, it also shifted its policy stance to “neutral” — a move that usually suggests fewer rate cuts ahead. Malhotra himself said there’s only “very limited space to support growth,” which added to the uncertainty.
These actions have raised doubts among economists. “It’s a somewhat confusing policy signal,” said Priyanka Kishore, an economist at Asia Decoded in Singapore. She warned that unclear communication could weaken the effectiveness of the rate cuts.
Malhotra is trying to revive economic growth, which slowed to 6.5% last year — below the 8% target set by Prime Minister Modi. But despite three interest rate cuts since Malhotra took over six months ago, both businesses and consumers remain cautious about borrowing. Banks, in turn, are holding on to the extra money rather than lending it out.
Adding to the confusion, the RBI announced it would reduce the cash reserve ratio (CRR) for banks in stages starting September — a move expected to release ₹2.5 trillion ($29.2 billion) into the banking system. This puzzled some analysts because there’s already excess liquidity in the market.
Then, just days later, the RBI said it would stop injecting daily funds into the system, sparking speculation that it may even start pulling money out. Economist Sonal Varma of Nomura questioned why the RBI would cut the CRR at a time when liquidity is already high.
These shifting policies caused instability in the bond market, pushing up yields and forcing two government-run firms to cancel their plans to issue rupee bonds. Yields on high-rated corporate debt rose after falling briefly when the RBI first announced the cash injection.
Despite the liquidity boost, credit growth remains weak. As of June 10, banks had parked ₹2.7 trillion in the RBI’s overnight facility, rather than lending it out. In fact, loan growth recently dropped below 10% for the first time in over three years.
The RBI’s actions have also caused short-term market interest rates to fall below the central bank’s policy rate of 5.5%, highlighting the imbalance.
Economist A. Prasanna from ICICI Securities noted that the RBI’s new approach — using its policy stance as a signal for future interest rate changes — is a shift from the past, where the stance reflected a broader view of liquidity and credit conditions. He added that this new communication style might be confusing to market participants who aren’t used to it.
