Will the RBI Continue Its Liquidity Management Operations?
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Synopsis
The RBI is dedicated to maintaining liquidity management operations to support economic productivity. With inflation trends and monetary policy shifts, the central bank is poised to tackle evolving macroeconomic challenges effectively.
Key Takeaways
- RBI continues liquidity management operations.
- Policy repo rate reduced to 6.0 percent.
- Inflation averaged 4.6 percent in 2024-25.
- Accommodative monetary policy stance adopted.
- Proactive measures taken to manage supply and demand.
New Delhi, May 29 (NationPress) The Reserve Bank of India (RBI) announced on Thursday that it will persist in its liquidity management operations, aligning them with the monetary policy framework to ensure that system liquidity remains sufficient to satisfy the productive needs of the economy.
A favorable inflation outlook and moderate economic growth necessitate a monetary policy that is supportive of growth, while also being vigilant regarding the swiftly changing global macroeconomic landscape, as stated by the Central Bank in its 2024-25 annual report.
“An appropriate mix of instruments will be utilized to manage both frictional and sustainable liquidity, thereby ensuring stable movement in money market interest rates,” the Reserve Bank elaborated.
With inflation dipping below the target in February and March 2025, aided by a significant decrease in food inflation, there is now increased confidence regarding a sustainable alignment of headline inflation with the target of 4.0 percent over the coming year.
Consequently, the RBI's Monetary Policy Committee (MPC) unanimously voted in its April meeting to lower the policy repo rate by 25 basis points to 6.0 percent. Additionally, the MPC opted to shift its stance from neutral to accommodative.
Inflation moved closer to the target during 2024-25, supported by reduced input cost pressures, proactive supply management initiatives by the government, and the ongoing impact of previous monetary policy actions.
Headline inflation averaged 4.6 percent during 2024-25, down from 5.4 percent the previous year, primarily due to a decline in core inflation (CPI excluding food and fuel) to 3.5 percent and deflation in fuel at 2.5 percent. The reduction in core inflation was widespread across both goods and services, according to the RBI.
Throughout the year, liquidity conditions remained surplus, as demonstrated by the average daily net absorption under the liquidity adjustment facility (LAF), which rose to Rs 1,605 crore during 2024-25 from Rs 485 crore the previous year.
The Reserve Bank executed various market operations, including open market operation (OMO) purchases, USD/INR buy/sell swaps, and longer tenor variable rate repo (VRR) operations, along with a 50 basis point reduction in the cash reserve ratio (CRR) (in two phases of 25 bps each) to ensure sustainable liquidity in the system.
Point of View
The RBI's ongoing commitment to liquidity management reflects its proactive approach in ensuring economic stability. The measures taken are crucial in navigating the complexities of the current global economic climate, and it is essential for the nation to support the RBI in these endeavors.
NationPress
08/06/2025
Frequently Asked Questions
What is the current policy repo rate set by RBI?
The current policy repo rate set by the RBI is 6.0 percent, following a reduction of 25 basis points.
How has inflation trended recently in India?
Inflation has fallen below the target, averaging 4.6 percent during 2024-25, primarily due to decreased food inflation.
What measures is the RBI taking to manage liquidity?
The RBI is utilizing a combination of instruments, including open market operations and reducing the cash reserve ratio, to manage liquidity effectively.
What is the RBI's stance on monetary policy?
The RBI has shifted its stance from neutral to accommodative to support economic growth.
How does the RBI's liquidity management affect the economy?
Effective liquidity management by the RBI helps ensure that the economy has sufficient funds to meet productive requirements, contributing to overall economic stability.
