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India’s central bank governor expects the country’s interest rates to remain low for a “long period” as it enjoys robust economic growth that could soon be boosted by trade pacts being thrashed out with the US and Europe.
In his first interview with an international news organisation since being appointed governor of the Reserve Bank of India one year ago, Sanjay Malhotra said rate cuts made during his tenure had helped engineer a “Goldilocks” phase of brisk growth with low inflation.
The central bank’s projections suggested rates “should remain low for a long period of time”, Malhotra told the Financial Times at the RBI’s headquarters in Mumbai.
India’s headline consumer price inflation rate was 0.71 per cent in November, well below the 2 per cent lower limit of the RBI’s target range, but the central bank has forecast it will rise to 2.9 per cent in the January to March quarter.
The RBI currently expects year-on-year GDP growth to moderate to 6.7 per cent in three months starting next April from a blistering 8.2 per cent in the July-September quarter.
Malhotra said the central bank’s economic forecast had not taken into account the potential effect of trade agreements currently under negotiation, which if sealed would raise the GDP growth rate.
“The impact of the US trade deal could be as much as about half a percentage point,” he said.
The central bank had not looked at the possible impact of the EU trade deal as deeply, but it would also increase growth, he said, declining to comment on when the agreements might be finalised.
After months of negotiations, Indian officials have signalled that an agreement with Washington that will reduce the tariffs will probably be signed before the year’s end. India and the EU also hope to seal a trade deal in weeks.
The outlook for India’s economy, the fastest growing of any large nation, appeared to darken in August when US President Donald Trump increased tariffs on many Indian exports to 50 per cent in what he said was punishment for the country’s purchases of Russian oil.
But India’s relatively modest export profile compared to other Asian nations has limited the fallout from Trump’s tariffs, and analysts said their imposition likely spurred Prime Minister Narendra Modi’s government to hasten reforms such as simplifying goods and service taxes and implementing new labour codes.
Malhotra was thrust into the governorship last year amid open frustration among ministers over the RBI’s reluctance to lower borrowing costs at a time when growth was slowing, but inflation was often close to and in October 2024 even above the bank’s target range upper limit of 6 per cent.
The governor, a career bureaucrat and former head of the finance ministry’s revenue department, has since moved aggressively. Over the past year the RBI has delivered 1.25 percentage points of cuts, India’s first reductions in five years.
Malhotra admitted that the most recent headline GDP figure “was surprising” and that the RBI — which had predicted 7 per cent year-on-year growth in the July-September quarter — had to “improve our forecasting”.
Some economists have questioned the quality of India’s data, which saw a large deflator effect increasing the real GDP gain, as well as half the headline growth coming from the opaque “discrepancy” category.
When asked if issues with the data made the RBI’s job more difficult, Malhotra said: “Some margin of error will always be there because these figures do get revised.”
“That margin of error has to be always kept in mind when you are making any policy,” he explained. “Otherwise I think the figures are quite robust.”
The government’s chief economic adviser, V Anantha Nageswaran, told the FT earlier this month that the claim India’s statistics overstated the economy’s strength “does not hold water”.
The rupee has been a victim of trade tensions with the US, falling to record lows and recently moving past the psychologically important Rs90 per dollar barrier. It is Asia’s worst-performing currency this year.
Traders and bankers say the RBI under Malhotra has taken a less interventionist approach on the currency. The IMF last month said there had been a change in the RBI’s management of the rupee to a more freely moving “crawl-like arrangement” from the previous approach where it “stabilised” the currency.
The governor insisted he had not diverged from previous RBI policy, reiterating that the central bank did not target a specific rupee level and only sold dollars to curb excess market volatility.
Sitting beneath painted portraits of previous RBI governors, Malhotra said his top two priorities had been maintaining financial stability and strengthening the financial system.
The RBI under his tenure has loosened some regulations, allowing banks to finance corporate acquisitions and to lend more freely against listed securities, while removing extra provisioning requirements on loans to big companies and easing capital buffers for non-bank infrastructure lenders.
Malhotra contested the description of these moves as “reforms”, calling them instead mere “incremental measures”.
“They are work in progress — it’s a continuous affair,” he said. “Some of those regulations, which were decades old and lost their edge, they needed to be refined.”
