RBI’s growth shift: Is the private sector ready to step up?

Interesting developments are unfolding in the financial sector. The RBI has just reduced risk weights on bank loans to NBFCs and MFIs, providing much-needed relief to these critical lenders. For a central bank known for its cautious approach, this is yet another step in a series of moves that signal a shift. The new governor seems more growth-oriented, a stance that markets have quickly picked up on. Some would say this is the RBI simply responding to economic realities. Others might argue it aligns with the government’s open expectations from the central bank.

The cues have been visible for a while. In October, two senior union ministers, including the Finance Minister, publicly urged the RBI to cut rates. That was an unusual moment. The government was nudging an institution that is fiercely independent, yet inextricably linked to the larger economic agenda. Whether that public signalling influenced decisions or not, the RBI has since made a series of moves that point to a clear priority — supporting economic momentum.

• The reduction in rates was the first major shift. By cutting borrowing costs, the RBI has eased financial conditions across the board. Households, businesses, and banks all stand to benefit. Lower rates improve affordability for consumers, encourage businesses to invest, and provide a broader stimulus to demand.
• Infusing liquidity into the banking system was the next logical step. The RBI has ensured that banks have ample funds to lend, keeping credit conditions accommodative. Liquidity injections help prevent financial stress, particularly in an environment where global uncertainties still loom large.
• Delaying the Expected Credit Loss (ECL) framework gave banks breathing space. Had the norms been implemented as scheduled, banks would have had to provision more aggressively for potential loan losses. This would have tightened lending at a time when the economy needed more credit, not less. By deferring this requirement, the RBI has prevented an unnecessary credit crunch.
• The relaxation of project finance norms is a significant move. Infrastructure and capital-intensive industries require long-term financing, and strict regulatory conditions can make it difficult for banks to extend credit. By giving banks more flexibility, the RBI has made it easier to finance large-scale projects—something crucial for sustaining economic expansion.
• Tweaks to Liquidity Coverage Ratio (LCR) norms further reinforce the shift. Banks are required to maintain a certain level of liquid assets, but relaxing these rules temporarily allows for more lending without increasing systemic risk. This adds to the overall liquidity boost in the economy.
• And now, the relaxation of risk weight norms for NBFCs and MFIs strengthens the lending ecosystem further. These entities play a critical role in last-mile credit delivery, particularly in rural and semi-urban markets. A lower risk weight means banks can extend more credit to them at better terms. This move alone has the potential to unlock a fresh cycle of lending, consumption, and business activity.

Clearly, the RBI’s approach has changed. The priority is growth. The economy has faced a sharp consumption slowdown, with rural demand weak and discretionary spending in urban centres subdued. The government has already stepped up with significant capital expenditure. Now, with the central bank providing further support, there is a real chance of a consumption revival.

The appointment of former RBI Governor Shaktikanta Das as Principal Secretary to the Prime Minister must also be seen in this context. The global economic landscape is shifting, with geopolitical volatility, supply chain realignments, and financial stress in major economies. Das brings deep experience in steering India through multiple crises — be it the NBFC turmoil, pandemic shocks, or sectoral downturns. His presence in the PMO at this juncture signals a deliberate move to ensure stability amid global uncertainty.

Even as monetary and fiscal measures create a conducive environment, external factors remain a variable. The monsoon will be crucial. A harsher summer than last year could strain agricultural output, keeping food inflation elevated and dampening rural consumption. On the other hand, a favourable monsoon could reinforce demand, particularly in agrarian regions. Inflation dynamics will also play out based on weather conditions and global commodity prices. The RBI will need to remain watchful, ensuring that growth-supportive measures do not lead to overheating.

The real question now is whether the private sector will respond. For several quarters, it has been the government that has driven capital expenditure. Public investments in infrastructure, energy, railways, and manufacturing have kept the economy moving. Meanwhile, private sector capex has remained muted. Companies have cited global uncertainties, lack of demand visibility, and cost concerns as reasons for their cautious stance. But with financial conditions now the most supportive they have been in years, what is the private sector waiting for?

Investment cycles require confidence, but they also require action. The government has done its part, providing policy stability and pushing massive infrastructure spending. The RBI has done its part, easing financial conditions and ensuring credit availability. At what point does corporate India step up?

Every year, after the Union Budget, industry leaders issue glowing statements about the vision and reforms announced. They speak of animal spirits being unleashed, of the golden opportunity ahead. The time for statements is over. Will they now put their capital behind their words? The foundation has been laid. The liquidity is available. The economy is waiting.

Authored by Dr. Srinath Sridharan, a Corporate Advisor & Independent Director on corporate boards.

Views expressed do not represent the stand of this publication.