We expect policy rate to be at current level or lower for a long time: Sanjay Malhotra, Governor, RBI

While policy rates in India are likely to stay at current levels or even go lower for an extended period, there are risks as well, Malhotra said. Inflation is looking benign and going forward, underlying inflation is expected to remain low. It will depend on growth-inflation dynamics as they play out. We are still living in very uncertain times, the RBI Guv added.

[We expect policy rate to be at current level or lower for a long time: Sanjay Malhotra, Governor, RBI]

Sanjay Malhotra, Governor, RBI

*Reserve Bank of India governor Sanjay Malhotra told Sangita Mehta and Sruthijith KK in an interview that India's Goldilocks phase can be sustained as macroeconomic fundamentals have strengthened over the decades while cautioning that global uncertainty, climate risk and technology disruptions continue to pose challenges. Policy rates are likely to stay at current levels or even go lower for an extended period, he said, provided there are no shocks. Malhotra also touched upon the economy, inflation, electronic payments, non-bank lenders, artificial intelligence and the insolvency code among other matters. The interview took place before the West Asian conflict began. Edited excerpts:*

Given the change in tariff assumptions and the latest inflation and GDP data, have you revised your growth and inflation outlook?

In the recent MPC (monetary policy committee) statement, we mentioned that in view of the forthcoming revision in the base year and methodology, we will be giving the full-year projections of growth and inflation in the next policy. We have not yet finalised numbers for the next year. We are still analysing the impact of the changes. Our analysis will also account for the impact of changes in tariffs.

In the last two policies you have maintained that India is in the Goldilocks phase, but given the nature of economic cycles, how long do you expect it to last?

Broadly, over the years, macroeconomic fundamentals of our country have improved-from what used to be a sub-6% growth in the 80s and 90s, to more than 6% in the first decade of this century, and 6.6% in the last decade, and now about 7.3% during FY24-FY26, as per the new series. The momentum of growth is actually accelerating. Similarly, if you look at inflation, it used to be very high in the 80s and 90s. In the nine years preceding inflation targeting, the average headline inflation was 6.9%. In the subsequent nine years, however, it was 4.9%. If you look at recent trends, it is even lower. Health of corporates, banks, governments, private sector are all much better. That gives me confidence that in the short, medium, and long run, our macroeconomic fundamentals will continue to remain healthy and robust.

What could be the downside risks?

The downside risks are geopolitical tensions, geoeconomic uncertainties, and climate-related events. A large part of our population still relies on a monsoon-dependent agrarian economy. And then, technology disruptions.

Experts are interpreting MPC as ending the easing cycle. Is this as good as it gets for borrowers?

We expect the policy rate to be around this level or lower for a long time, barring any shocks.

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Currently, inflation is looking benign. We have been in this stage for some time. So, 3-3.5% is the underlying inflation number, as per the old series, if you subtract precious metals. Going forward too, the underlying inflation is expected to remain low.

Now, what are the risks? It will depend on growth-inflation dynamics as they play out. We are still living in very uncertain times. We will assess it meeting by meeting based on incoming data.

While growth numbers are good, foreign and private investments are not as strong. What explains this?

The Indian economy continues to be very resilient. The GDP growth rate for the first half of this financial year was 7.6%, which is also the estimate for the full year, in terms of the new series. The strong growth rate is not only on the consumption side, which grew by 7.8%, but also on the fixed-investment side that expanded by 7.1%. On the supply side, manufacturing and services both have contributed. These numbers suggest that growth is broad-based.

Investment has picked up, including private investment. Gross foreign direct investment (FDI) has been robust. Last year it grew about 13%, and this year as well, growth of gross FDI is good. It is only net FDI which has not been growing as much, not because gross FDI is not increasing, but because repatriations and overseas direct investments have increased in the last two years. This is organic and healthy.

Our macroeconomic fundamentals are robust. There are investment opportunities abroad; therefore, increase in overseas direct investments is to be expected. The repatriations also tend to occur as per investment cycles.

Would you say the same for foreign institutional investors (FIIs)? Is India being hurt by the anti-AI trade?

FIIs have relatively shorter investment horizons. Relative valuations in our country were higher to some extent, though there has been some correction. Moreover, investments moved towards countries with AI opportunities. It has nothing to do with our macroeconomic fundamentals. India too is investing in all five layers of AI-energy, chips, infrastructure, LLMs and applications-and AI adoption is also rising. India will certainly be part of this AI story as evident from the AI summit held recently.

The weighted average call rate (WACR) is below the policy rate. Why?

Generally, the effort is to have the WACR closely aligned to the policy rate. Transmission to call rates have been strong. It is possible, at times, that the WACR may not align exactly with the policy rate. With large surplus liquidity in the system, it has recently moved below the policy rate, but it continues to remain within the corridor.

Forex reserves have touched an all-time high. To what extent can they cover external liabilities?

Our macroeconomic fundamentals remain strong. The external sector is robust. Going forward, the current account remains very manageable. Our forex reserves can cover current account deficits over decades. Several FTAs have been signed and some are in the pipeline. That will help the current account and also the capital account by bringing investments into India. Over $250 billion of investment pledges have been made during the AI summit. Earlier, $67.5 billion was committed by tech giants. The government has liberalised the insurance sector to allow 100% FDI.

Currency in circulation has crossed ₹40lakh crore despite a surge in UPI transactions. With the idea of digitisation, shouldn't it come down over a period of time. What explains this?

We should look at it not in absolute terms but as a percentage of GDP, which is about 11-11.5%, slightly lower than earlier. As an economy grows, demand for cash too will increase. At the same time, due to increasing usage of digital payments including UPI, cash as a percentage of GDP has decreased. These trends play out gradually over the long term.

UPI volumes are rising but the budgetary allocation is ₹2,000 crore. How will the model be sustained?

We are committed to providing UPI and other payment services to the public. Some of them like UPI are free to the users, because they are for public good. I do not think funds will be a constraint in its proliferation and usage.

After a period of depreciation, do you expect the rupee to remain steady at current levels?

The level of the rupee is determined by demand and supply of foreign exchange. As per historical trends, the rupee has generally strengthened in the last quarter of a financial year. I would also like to emphasise that we do not target any levels. We only aim to curb any excessive volatility either way.

Recurring payments on international platforms using credit cards have become complicated. Is this being addressed?

There is a constant endeavour to make cross-border payments more accessible. We are linking UPI with fast payment systems of other countries.

On mis-selling of products, who determines suitability? Will there be coordination with the IRDAI?

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*Original source*