In an interview with Business Standard, RBI Governor Malhotra clarified the policy stance in midst of confusion over the near-term guidance, that we highlighted in our note yesterday. Governor emphasised that the change in policy stance (to neutral from accommodative) was intended to introduce flexibility in the path forward, instead of implying an immediate reversal of the rate cycle. He added that if the evolving price outlook undershot the RBI’s projection (RBIf FY26 inflation at 3.7% yoy), space for further easing up could re-open. On liquidity, the repo/ reverse repo (VRR/ VRRR) auctions were intended to be fine tuning operations, with policymakers committed to maintaining sufficient liquidity in the domestic system. Countering market speculation and press reports that the cash reserve ratio might be used more frequently to manage liquidity, he maintained that ‘3% of reserves seem adequate’ to be utilised as a policy tool to provide liquidity as and when required. Expecting yields at the short to belly of the curve to be placated by the other remarks. the RBI opined that the spread of the long end of the curve vs the repo rate was in line with historical averages, thereby at ‘congenial’ levels. Lastly, the central bank will continue to “weigh the trade-off between keeping WACR closer to the SDF rate for better transmission or closely aligned to the policy repo rate as part of our framework and act accordingly”. These remarks are likely to provide relief at the short end of the bond curve as yields had risen in absence of fresh dovish catalysts. We maintain our call for a pause in rates in the short-term, monitoring incoming inflation numbers to gauge if further easing needs to be built into our base case.
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