Informist, Friday, Jun. 27, 2025

By Shubham Rana

NEW DELHI - The weighted average call rate – the formally stated operating target of monetary policy – staying closer to the Standing Deposit Facility rate of 5.25% instead of the repo rate of 5.50% is not a cause of concern, Ram Singh, external member of the Reserve Bank of India's Monetary Policy Committee, said. Singh expects the weighted average call rate to align with the repo rate going forward.

"In an easing cycle, it (weighted average call rate below repo rate) is not a matter of concern as the idea is to ensure that no segments of the financial market face any constraints in the transmission of the rate cuts," Singh told Informist in an e-mail interview. "It will disturb me only if it leads to some kind of arbitrage or contributes to bubble formation in the asset market. Currently, there are no indications of these concerns."

As the weighted average call rate is the operating target of monetary policy, the RBI's liquidity management framework seeks to align it with the repo rate, which is the policy rate. With its liquidity management, the central bank has in the past allowed the weighted average call rate to drift to the extremes of the Liquidity Adjustment Facility corridor – 25 basis points on either side of the repo rate. This is often termed a 'shadow' rate hike or cut.

The weighted average call rate has remained closer to the floor of the LAF corridor for a few months now. As per RBI data, the weighted average call rate has stayed below the repo rate consistently since Mar. 25. Since Jun. 6, when the MPC cut the repo rate by 50 bps, the weighted average call rate has averaged 24 bps lower than the repo rate. It had averaged 23 bps below the repo rate between Apr. 9 and Jun. 6, the last two MPC meetings.

There has been a lot of debate in financial markets about what the operating target of monetary policy should be. The RBI is reviewing its liquidity management framework, and has held meetings with bankers and economists to discuss the efficacy of weighted average call rate as the main monetary policy target. Informist had reported in May that some bankers had suggested the secured overnight rupee rate and other collateralised market rates for the operating target.

The repo rate is currently 5.50%, having been cut by 100 bps this calendar year after the RBI's rate setting panel reduced it by a larger-than-expected 50 bps on Jun. 6. The MPC also changed the policy stance to 'neutral' from 'accommodative'.

Singh, a director at the Delhi School of Economics, said the MPC changed the monetary policy stance to 'neutral' primarily in view of a highly uncertain global economic situation and a fluid geopolitical scenario. "By definition, the neutral stance gives the RBI flexibility to keep the repo rate unchanged, lower it, or hike it depending on the situation," he said.

According to Singh, a change in stance does not mean that the rate-cutting cycle has ended, even as the space for further rate cuts is low after the 100 bps of easing so far. "However, having reduced repo rate by 100 basis points, before we consider additional rate cuts, we must be cautious, given the heightened uncertainty on global growth and geopolitical fronts," he said.

The MPC also wants to see how much of the interest rate easing gets transmitted to the real sector of the economy, Singh said. The six-member panel will examine incoming data before taking a decision on further rate cuts, Singh said, adding that the change in stance to neutral was a "signal to decision-makers such as borrowers and investors that this might be a good time to execute their decisions".

The key determinant for another rate cut would be incoming inflation and growth data, Singh said, with inflation the first-order consideration. "I am hoping for a pleasant surprise on the inflation front. If the actual CPI inflation prints lead to a downward revision of the estimates (currently at 3.7%), it will create room for further rate cuts," he said.

CPI inflation fell to a 75-month low of 2.8% in May and is expected to fall to around 2% in June. For the current financial year, economists polled by Informist expect inflation to average 3.5%, lower than the central bank's forecast of 3.7%. "May's inflation print has surprised on the positive side. In the unlikely scenario that growth comes under stress, this will also be a consideration," Singh said.

Asked if a 5.00% repo rate was possible in this cycle, Singh said it wasn't prudent to provide any specific forward guidance on the terminal repo rate in the current geopolitical situation, in which risks were difficult to quantify. "The geopolitical situation since the June 2025 MPC meeting has highlighted the upside risk to India's inflation trajectory due to increases in oil and fertiliser prices," Singh said. While this could exert pressure on the Indian rupee, adding to the risk of imported inflation, the RBI's foreign exchange reserves of nearly $700 billion provide a significant cushion, the MPC member said.

"All considered, I expect CPI inflation to stay below the target level of 4%," he said. Singh is also confident of India's GDP growing 6.5% in FY26, as projected by the central bank. Some economists expect GDP growth to be closer to 6% this year, but Singh is of the view that the 100 bps of rate cuts reduce the downside risk to the 6.5% growth forecast and increase the odds of higher growth.

The MPC member expects a "significant increase" in demand for credit, specially home and auto loans, because of the 100 bps of rate cut. He expects credit growth to pick up significantly by the second half of FY26, thanks to the assurance of sufficient availability of durable liquidity by the RBI, the tax concessions announced in the Union Budget for FY26, and an increase in dividend distribution by companies. "This means more income in the bank accounts of individuals and households," Singh said.

"Once demand picks up, private capital expenditure will also increase," he said. "Corporations have a super healthy balance sheet. You look at the debt-to-equity ratios, and they are unreasonably low. This rate cut should encourage corporates to leverage their balance sheets for undertaking capital expenditure."

According to Singh, the Indian economy has the potential to grow at more than 7%, with monetary policy providing a supportive hand. Growth of 8% or higher "is ambitious but achievable", he said. "The investment-GDP ratio needs to be raised. It will also require factor market reforms – rationalisation of land use regulations, upgradation of the workforce's skill set, and reduction in the burden of non-financial regulation." End

US$1 = INR 85.56

Edited by Avishek Dutta

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