RBI Governor Sanjay Malhotra Says Interest Rates Should Remain Low For A 'Long Period'

Reserve Bank of India Governor Sanjay Malhotra expects interest rates to remain low over a “long period” as India’s growth remains strong and could soon be boosted by trade deals with ongoing negotiations with the US and Europe, Financial Times reported. Rate cuts delivered during the past year under Malhotra’s tenure had helped engineer a “Goldilocks” period for strong growth and low inflation, he said in an interview given to the newspaper.

The RBI’s Monetary Policy has reduced the benchmark repo rate by 125 basis points starting in February. This was the first rate-easing cycle over the past five years.

The RBI’s projections suggest that interest rates “should remain low for a long period of time”, Malhotra told the paper. India’s headline inflation in November was 0.71 per cent, up from a record low of 0.25 per cent posted in the previous month. Headline inflation has remained way below the RBI’s lower end of 2-6 per cent target range. However, the RBI has projected headline inflation to rise to 2.9 per cent in the March quarter. The RBI expects the gross domestic product (GDP) growth to moderate to 6.7 per cent in the June quarter of the next financial year, down from a firm 8.2 per cent posted in the September quarter of the current year.

Malhotra said that the RBI’s economic forecast did not take into account the potential effect of trade agreements currently under consideration, which, if they reach trade deals, could boost GDP growth.

“The impact of the US trade deal could be as much as about half a percentage point,” the paper quoted Malhotra as saying.

Ongoing negotiations with the US, which have lasted several months, are expected to fructify into a trade deal by the end of the year, government officials have signalled. India also hopes to finalise a trade deal with the EU in the next few weeks. The US has imposed 50 per cent tariffs on Indian goods, but the rationalisation of goods and service tax (GST) rates has limited the impact on the GDP growth rate.

Malhotra also said that maintaining financial stability and strengthening the financial system remain his top priorities. He reiterated that the central bank was not looking to target any specific level in rupee and only intervened in the foreign exchange market to reduce excess market volatility. The rupee has fallen to a record low of 91 to a dollar, falling nearly 5.5 per cent during the year, due to increased trade deficits and US tariff imposition.