'High growth, low inflation, India is in a sweet spot': RBI Governor Sanjay Malhotra

Q. You have had an unusually eventful term so far. Donald Trump’s tariffs, whose weight India has felt unfairly, have shaken global trade. The rupee has fallen sharply. So has inflation, to a multi-year low. Yet India clocked 8.2 per cent GDP growth in Q2FY26. You have called it a Goldilocks phase for the Indian economy. What did you mean?

In economic terms, Goldilocks phase is the balance of growth and inflation. Usually, high growth leads to high inflation, and low inflation is accompanied by low growth. But we are having the best of both worlds—low inflation and high growth. That’s a sweet spot to be in.

Q. Are we genuinely in a structurally strong phase of growth or is this a window created by a unique alignment of global and domestic factors?

Despite the external headwinds of geopolitical events, tensions and trade fragmentation, the Indian economy, in the first three quarters for which we have data this calendar year, has done remarkably well, both in terms of inflation, where we are at historic lows, and in growth, where we have averaged about 8 per cent. Going forward, for FY26, we are projecting growth of 7.3 per cent, and for the next two quarters of FY27, 6.7 and 6.8 per cent, respectively. Frankly, it’s very difficult to precisely forecast what the numbers will be over a long period. But, yes, this sets the stage for India to do well.

Q. Where does the Indian economy stand in comparison with other world economies?

India continues to be the fastest-growing major economy in the world. The US, which is the largest economy, is growing at less than 2 per cent. China, the second largest economy, is growing at under 5 per cent. In growth outcomes, we have no competitors among all the major economies, whether in the Euro zone, the UK or Japan, in which growth hovers at around 1 per cent or less. Indonesia is the closest at about 5.0-5.5 per cent. So, we don’t have any peers as far as growth numbers are concerned.

Q. How sustainable is India’s Goldilocks phase? What are the risk factors?

If you look at the past four years, average GDP growth is about 8 per cent. If you look at the past decade, we had average growth of 6.6 per cent. This is due to a combination of measures the government and the central bank have taken. Number one, most importantly, policy stability and continuity that have provided certainty. There is financial stability, price stability and the continuous focus on growth because of a number of reforms and ease of doing business measures.

Q. Which reforms are you referring to?

The recent GST rationalisation was one, followed by labour reforms, the PLI schemes focusing on manufacturing and employment, and the balance sheets of the government, the private sector and the households in good shape, saw high capacity utilisations. So, overall, when you look at each sector and every area of the economy, we are in a very good phase. This should help us sustain the momentum, going forward.

Q. While GDP growth looks great, what matters to the general public is if it’ll create jobs. Is the Indian economy still growing faster than it’s hiring?

While price stability and supporting growth are our main objectives, one can’t overlook employment, which I believe, over the years, has been doing quite well. If you look at the latest monthly PLFS (Periodic Labour Force Survey) data, unemployment is down to 4.7 per cent this November compared to 5.6 per cent in May. In fact, it has steadily come down from 2017-18, when the labour force participation rate as per the annual PLFS data used to be in the region of about 50 per cent. It improved to 60 per cent in 2023-24. That doesn’t mean we don’t have to create more jobs—we do need to create quality jobs at a higher pace and at higher wages. And I think the economy is in a good position to do so.

Q. What about inflation? Are you confident of sustaining the current low rates?

Yes. Average inflation has been rather benign over the last several months, below the 4 per cent target. Of course, the low number in the recent period is primarily because of the base effect, and the sharp moderation in food prices. Structurally, we have been witnessing a lower inflation, averaging 4.9 per cent in the nine years post the inflation targeting regime introduced in 2016. Before that, it used to be about 7 per cent. Going forward, as a result of the measures the government and the RBI have taken inflation is expected to remain benign for a long period of time, provided we do not face any supply side shocks.

Q. Since February 2025, the RBI has cut the policy rate by 125 basis points (bps). It is now 5.25 per cent. This is striking because the last comparable easing happened in 2019 or so when there was a sharp slowdown in growth. This time, rates have been cut despite high GDP growth. What has changed in the RBI’s assessment?

The last time we brought down rates to as low as 5.25 per cent, and then even further down to 4 per cent, we were in a different situation—growth was low and inflation high, with headline inflation more than 4 per cent in 2021. This time around, growth is good and inflation benign. Monetary policy is always forward-looking and with inflation projected at 3.5 per cent or so and growth expected to moderate over the next two quarters, the policy repo rates were lowered.

Q. And going forward?

Monetary policy is not preset, it is evolving. We are data-dependent. We are in a neutral phase. It is for the MPC (Monetary Policy Committee) to see what the data points are and what we should be doing. However, as I mentioned, I do feel inflation will remain benign for a long time. And if that is so, barring shocks on the supply side, the weather, geopolitics or something else, we’re in for a long period of low policy rates.

Q. What did you hope to stimulate in the economy with this series of repo rate cuts?

Our objective is to spur demand, and you can see it happening now. Consumption expenditure has shown good growth in the last 2-3 quarters. Overall, there is good credit growth and higher offtake, especially in MSMEs and personal loans like home loans. Why do I cite these? Because these are linked to external benchmark rates and the monetary policy transmission happens quicker in these than in other sectors. So, it should further spur demand in the economy, which should help growth and jobs.

Q. The Indian rupee is now 91 to the dollar and yet the RBI, unlike in the past, seems in no rush to aggressively defend a specific level for its currency. Is the central bank consciously allowing exchange rate flexibility?

On currency, we have a very stable, stated policy that we do not target any level or price band but let the market forces determine what the appropriate level of the rupee should be, whether it is the dollar or the pound or the euro or any other foreign currency. Our aim is to primarily curb any kind of undue or excessive or abnormal volatility or any kind of unnecessary speculation getting built into the prices. That is when we come in. Otherwise, we let the market forces determine the prices, which, in the long run, we believe are quite efficient. So, it is not that we have made a conscious effort to let the rupee depreciate.

Q. In the past four years, the RBI has spent billions of dollars shoring up the rupee. So, will the policy going ahead be that the RBI will not intervene unless, as you said, there are major fluctuations?

First of all, I don’t think there is any major change in RBI policy. As I mentioned earlier, the policy has been very stable over the past few years and it’s only undue or excessive volatility that we try to reduce. Secondly, some volatility will continue to happen, which business has factored in and prepared for. In the past 10 years, rupee depreciation has on an average been about 3 per cent per year and, in the previous 20 years, about 3.4 per cent. So, the depreciation on average has come down and even going forward, the depreciation level should not be significantly different. We are quite confident of having a very strong and robust external sector position. We have 11 months of import cover for goods, and we have 92 per cent coverage for our external debt. Our external debt is about $750 billion, and we have about $690 billion of forex reserves. So, we are very comfortable in meeting our external sector liabilities, whether in the current account or on the capital account.

Q. What are the key reasons the rupee will not depreciate in a way that will harm the economy?

The rupee tends to depreciate because our inflation is generally higher than other advanced economies. So, to some extent, a depreciation is not out of sync. However, it may not be a smooth or secular kind of decline. There will be ups and downs, which are expected because, in markets, whether forex or others, a lot gets driven by sentiment and events. The fundamentals of our country continue to remain strong. We are well poised to meet all our external requirements and so the rupee should be at a level which supports our Indian economy.

Q. Foreign portfolio investors have pulled out nearly Rs 1.6 lakh crore from equities in the past year; net FDI, too, was negative in September. Is this cause for concern?

I’d rather concentrate on the current account deficit, which previously was high, but over the years has shrunk rapidly to comfortable levels. So, we should be able to easily meet this kind of current account deficit given the flows we have on the capital account. On FPIs, there is volatility. FPI inflows have been rather low on the equity side. On the debt side, we have had good FPI inflows and expect them to continue. Similarly, gross FDI has increased, though net FDI may have been negligible. Gross FDI is the number we should be looking at from the economy’s point of view. Net FDI is relevant only for the external balance of payments position. It is still positive despite outward investments and repatriations, which are healthy signs of a strong, confident economy, that lets investments get repatriated when the investors want to do so.

Q. Coming back to GDP growth rates, the RBI’s forecast for FY26 has been 7.3 per cent, though those in the markets are already pencilling a higher number. What are the key drivers powering this momentum?

Both private final consumption expenditure and gross fixed capital formation have logged very good growth in the last two quarters. There have been some headwinds on the export side, but we should view this as an opportunity for us. We are seeing some early signs of it in terms of exports, with the tariff-hit sectors diversifying. The momentum conditioned by the many building blocks will carry us through in the coming years.

Q. The central government has always complained that private investment didn’t live up to expectations after the huge corporate tax rate cuts. Do you see that change now and is it sufficient to propel growth?

While gross fixed capital formation has grown by an average of 8 per cent since 2022-23, as has the GDP, private sector investment could have been better. But it is demand that leads to investment, not the other way around. And with consumption continuing to grow at a fast pace, I am confident private investment will further grow. Let us also keep a couple of things in mind about private investment. One, capital is becoming more productive and efficient. And two, the composition of our economy continues to be dominated towards the services sector, which is growing at a fast pace and is less capital-intensive. So, the growth in private investments will not be as high as earlier. But there are signs of revival in a few sectors and this should become more broad-based.

Q. Can you give us some examples?

If you see the power sector, for example, we were in a deficit situation earlier. To meet that deficit, the capital requirements were much higher. We are now more or less in a self-sufficient position. So, the growth in investment will not be as high in these sectors. On the other hand, you see higher investment growth in new sectors such as renewable energy, defence equipment, electronics, semiconductors and mobile phones. There is therefore a shift in sectors you would normally have tracked for private investment. Going forward, the good capacity utilisation and healthy balance sheets of the corporates and the banks eager to lend more to the real economy will go very well for private investment. The capital market is already doing well. I am quite bullish that private sector investment will continue to support further growth of our economy.

Q. Are you also factoring in the needs of Indian exporters who are facing pressure from US tariffs?

The RBI has been proactive in providing succour to all sectors adversely affected. If you are referring specifically to the tariff-hit sectors, we came out with a series of measures, including loan moratoriums.

Q. Are you happy with the current rate transmission or is there still room for lenders to lower interest rates in tandem with the RBI’s rate cuts?

Let me give you some data against the 100 bps cut, followed by another 25 bps done only recently. Against the 100 bps, the data we have till October show that, on average, the transmission from the purely interest rate side is 78 bps, which is very good. Transmission to MSMEs has been 83 bps against 100 bps because these are mostly linked to external benchmarks, including the repo rate. Similarly, home loans have decreased by about 95 bps. There is, of course, further room for transmission post our 25 bps rate cut.

Q. Is the RBI satisfied with how formal credit is reaching small businesses in the MSME sector?

MSMEs are one of our focus areas, apart from agriculture. MSME credit qualifies as priority sector lending within the 40 per cent overall Priority Sector Lending (PSL) target. There is a sub-target of 7.5 per cent, for micro and small enterprises under the overall PSL target of 40 per cent. There has been good growth of over 23 per cent in credit in the MSME sector as of October 31. In the micro and small enterprises, growth has been about 26 per cent and, in the medium, it is over 16 per cent. Transmission has been good.

Q. Is there room for improvement?

Yes, there is, as the potential is huge. We have several programmes for MSMEs. The unified lending interface is the latest we are in process of implementing. The Account Aggregator framework, which facilitates seamless and consent-based data-sharing, is another initiative that should propel further growth because a lot of information is now available digitally. Moreover, formalisation of the economy through GST and UPI data is helping better credit appraisal for MSMEs and facilitating more credit flows to the sector.

Q. The other concern is about diversification of household savings away from bank deposits. Is this a healthy shift or a worrying one?

There has been a remarkable shift in household financial savings over the years. From 90 per cent of financial savings being invested in bank deposits, currency and insurance in 2011-12 for which we have data, it has gone down to 56 per cent in 2024-25. So, there is a decrease in these instruments by 34 percentage points. This diversification helps savers because they get higher returns on their investment and it helps borrowers because they get alternative sources of funding. It is a win-win for both, because intermediation costs have come down.

Q. What is the current break-up of instruments for household financial savings?

In 2011-12, out of the gross household savings, close to 58 per cent were in bank deposits, 22 per cent in insurance and 11 per cent from currency. Today, the share of bank deposits has reduced to about 35 per cent, currency to about 6 per cent. Insurance is down to about 15-16 per cent. What has gained is shares, equity and mutual funds, which have moved up from less than 2 per cent in these 13 years to about 15 per cent now, and provident fund and pension funds from about 11 per cent to about 22 per cent.

Q. What makes it a healthy shift?

This is a good shift because one, there is a growing participation of the Indian people in equity. A lot of it, about 80-85 per cent, is through mutual funds and SIPs, so that is again long-term patient capital. Two, increase in pension funds is also healthy as it provides long-term stable capital to the Indian economy.

Q. Do you expect the recent GST revision to have a really big impact on consumption?

Certainly, it is already happening. The reduced prices have increased the purchasing power of people. To that extent, we will certainly continue to see good growth in consumption. The monetary policy easing for almost a year should also boost consumption. Most importantly, the central government’s focus on growth and the way the Indian economy is poised structurally with a very good foundation, should continue to help us grow for a long period.

Q. We have had a series of shocks in the banking sector. How confident are you about the resilience of the banking system at this point?

Barring a few episodes, the banking sector has been very resilient and robust. Profitability figures are good, with almost 14 per cent RoE (return on equity) an average. Asset quality again is excellent. The net NPA of 0.5 per cent is at historic lows. Capital adequacy is good with 17-plus per cent and liquidity coverage ratio (LCR) at about 130 per cent. Overall, the banking sector is quite strong. Governance has improved over the years. As a result of various measures taken collectively by the central government, the RBI and the banks, regulation has further improved and supervision has strengthened. Apart from the central bank’s policies, credit also goes to the central government which improved governance in public sector banks and provided the necessary capital. So, collectively, over the past 10 years, the banking system has certainly improved.

Q. How do you strike a balance between encouraging innovation and preventing excesses, especially in the fintech and NBFC sectors?

We already had a regulatory framework based on certain principles, which we have now formalised early this year. The first is that regulation will largely be principle-based, so that it can cater to most circumstances and we don’t have to change or amend with each new circumstance. It is now outcome and principle-based. The second is that it is proportional. So, we look at the cost-benefit analysis. We are mindful that regulation has costs but, at the same time, there are benefits. So we need to weigh both when we make a regulation.

Q. What are the other principles?

It has been our endeavour to have appropriate regulation that supports long-term growth and maintains stability. For example, we have concerns about crypto. But, at the same time, we promote digital payments. UPI is a success because RBI was one of the main drivers. Similarly, we facilitate and enable digital lending. So, while it is difficult, we strive to achieve the right balance.

Q. Since you talked about crypto currencies, there has been a lot of debate about good and bad crypto. What is the RBI’s stand?

Insofar as RBI is concerned, we believe there are certain risks. We have a very good payment system within the country, so there is really no problem on the domestic front which crypto is trying to solve. Our payment systems like UPI, NEFT and RTGS are fast, affordable and efficient. For cross-border payments, our view is that linking the CBDC (Central Bank Digital Currency) and fast payment systems of one country with the other is the way forward. And we will pursue this from our side. As far as crypto and the way forward is concerned, the central government has constituted a group, of which the RBI is a member. We have given our views there and the final decision will be taken by the government.

Q. Finally, what keeps the RBI governor awake at night?

It has been famously said that the job of the central banker is to worry. So, we are constantly alert to various risks that can emerge from anywhere. Those risks continue in the external sector, whether it is geopolitics, trade fragmentation, elevated public debt levels or higher asset prices in advanced countries, which can have spillover effects. There are also risks from technology. Domestically, of course, we have weather- and climate-related events which we must be alert to. Fiscally, the government is on a good track. They have been consolidating at both the Centre and states, and I am quite confident that, going forward too, they will continue to improve their balance sheets. n