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RBI Governor Sanjay Malhotra

Dear Reader,

He came, he spoke, and he was clear. The Reserve Bank of India’s new Governor Sanjay Malhotra meant business and showed so in his first monetary policy statement. He spelt out the intention to refine the building blocks of the flexible inflation targeting framework by beefing up the central bank’s data forecasting so that it is not caught on the wrong foot on inflation.

He also assured that as the banking regulator, the RBI would strengthen, rationalise, and refine the prudential and conduct-related regulatory framework, keeping in mind the trade-offs between financial stability and efficiency. In other words, he will give bankers enough time to meet regulations when they are tightened. The governor has given the first relief by postponing the proposed tighter liquidity coverage ratio (LCR) norms by one year to at least March 2026. This should make bankers who have been sweating to get deposits in tightening liquidity conditions sigh in relief.

While Malhotra is willing to be all consultative on regulation, he may pull up banks on efficiency. A peek into this is Malhotra’s quip that banks are not trading among themselves for funds by participating in the call money market and rather being lazy borrowers from the RBI’s liquidity windows. The RBI will also issue guidelines to tackle mis-selling of financial products by banks.

It was not lost on the markets that Malhotra stressed on the flexibility part of the inflation targeting framework, something that the central bank has not done much in the past. The band of 2-6 percent gives the flexibility to the MPC and the RBI to respond to growth concerns. Malhotra has put it to use finally. Even so, the governor was careful not to dilute the framework and explained that the central bank would want to be on top of things when it comes to inflation.

The repo rate was cut by 25 basis points and Malhotra laid down the rationale in quick succession. A slowing growth and an easing inflation meant “a less restrictive monetary policy is appropriate at this juncture”.

Indeed, as Dinesh Unnikrishnan points out in his piece here, there was no reason for the RBI to not cut rates today. Retail inflation has eased, and the biggest bugbear food inflation has begun to behave. Notably, the RBI’s assessment of inflation for the rest of the FY25 and in FY26 is benign. Inflation is projected at 4.2 percent in FY26, which is lower than 4.8 percent for the current year.

When you anticipate inflation to ease and growth to be soft, there is very little excuse left to avoid a rate cut. But the rate cut and the shift in growth and inflation was already known in the market. Perhaps that explains the lukewarm reaction in both equity and bond markets after the policy.

What is notable about the policy is not the outcome but the cohesive communication of the MPC statement. One can partly credit that to the new governor.

Recall that the projections in the December policy were not very far off than what has been given in the current policy. Numbers may be more benign, such as GDP growth for first quarter of FY26 is projected at 6.7 percent compared to 6.9 percent in the December policy. But it was clear two months ago that growth will slow. The quarterly projections on inflation are not far off the mark.

How did the MPC vote unanimously for a rate cut when it was split in December over the same and the RBI was stressing over potential upside risks that cannot be ignored? The MPC chairman, the governor, can steer the committee into a cohesive agreement and perhaps Malhotra is instrumental this time to convince worriers about inflation that growth needs more attention.

The long-awaited rate cut and the shift towards a more growth-oriented approach works for growth, but is unfriendly for the exchange rate. To that extent, Malhotra did not Trump-proof the economy and the exchange rate. US President Donald Trump’s tariff threats did not warrant an explicit mention in the policy but to his credit, the governor stressed a cautious approach amid global headwinds. As we had written here, the choice for the RBI was to pick an easier battle. Managing the exchange rate seems to be Malhotra’s battle pick. Only time will tell whether this strategy would work for the economy as exchange rate interventions have far reaching effects through the liquidity channel. Neha Dave, in her piece here, elaborates how global volatility would warrant a cautious approach from the RBI.

One hopes that here too the governor picks an efficient tool to manage liquidity, which according to the bond market is purchases of bonds under open market operations. Expectations have risen on these.

Lastly, the governor stayed clear of quotable quotes and literary flourishes, a style adopted by many previous governors and deputy governors. Perhaps, it is too soon to conclude his style, given this is the first of his policy statements and perhaps the governor will find his own preferred style of communication. For now, it looks like he is all about efficiency and keeping it simple and direct.

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Aparna Iyer
Moneycontrol Pro