New Delhi: The Reserve Bank of India’s (RBI) October 1 policy is being hailed as a turning point in the evolution of the Indian banking system. While technically a monetary policy review, the announcements are seen as a banking reforms policy that removes outdated controls and signals a shift from supervisory regulation to market-driven regulation.
This follows the RBI’s earlier move in June, when it slashed the cash reserve ratio (CRR) from 4% to 3% — a decision that freed up liquidity for banks. Together, these measures are reshaping the role of banks in India’s economic landscape.
RBI allows banks to finance acquisitions
One of the most consequential decisions in the latest policy is to permit banks to finance acquisitions, a practice that had been prohibited for more than two decades. The earlier restriction was based on the principle that India’s limited savings should fund capacity creation rather than corporate takeovers.
Now, with India’s capital markets providing ample growth capital through IPOs and other channels, the RBI appears confident that banks can be allowed to fund acquisitions without crowding out investment in new projects.
Sources reveal that SBI Chairman CS Setty strongly lobbied for this reform, urging the RBI to give banks greater freedom. Following the announcement, Setty described the move as “one of the most important” among the policy’s wide-ranging measures.
Implications for India Inc
With access to bank finance, corporate India is expected to step up acquisitions across industries where productive capacities remain fragmented — such as cement, textiles, FMCG, and consumer goods. Consolidation in these sectors could lead to stronger, more competitive players, while also aligning India with global practices where banks routinely back mergers and acquisitions.
Analysts note that this could also accelerate India’s corporate restructuring cycle, enabling companies to grow inorganically and optimise resource use.
A shift in RBI’s approach
Beyond the specifics of acquisition finance, the October 1 policy reflects a paradigm shift in RBI’s stance toward banking regulation. Instead of micro-managing banks through rigid controls, the central bank is increasingly trusting market forces and competitive pressures to guide efficient banking practices.
This new regulatory philosophy not only provides banks with greater autonomy but also signals the RBI’s recognition of the maturity of India’s financial system.
Conclusion
While the immediate economic impact of the reforms will unfold over time, the October 1 policy will likely be remembered as a watershed moment in Indian banking. By freeing banks to finance acquisitions and reducing liquidity constraints, the RBI has given financial institutions a wider canvas to support corporate growth.
If followed through with further reforms, this shift could mark the beginning of a more dynamic, market-responsive banking sector in India.