'On rates, it's status quo or cuts; concerned about banks' mis-selling of insurance': RBI governor Sanjay Malhotra

In his first interview since taking over as RBI governor, Sanjay Malhotra tells TOI’s Mayur Shetty & Sidhartha that while tariffs can have a short-term impact on economic growth, India’s status as the world’s fastest-growing economy won’t be impacted. On rupee volatility, he said RBI doesn’t target a specific rupee-dollar rate. And on FDs, the governor said lower inflation means real rates of interest on deposits will still be attractive. Edited excerpts:


What is your overall assessment of the Indian economy and how are the current trade dynamics affecting it? What adjustments are required?

India is the fastest-growing major economy this year and in the last decade too. It is poised to retain the numero uno position not only this year, but also in the decade ahead. Our economy demonstrates resilience amidst geopolitical and trade uncertainties. This confidence stems from several factors: monetary, financial, and political stability; political consistency and certainty; a congenial business environment; and strong macroeconomic fundamentals. Growth is supported by govt policies, strong balance sheets of corporates and banks, a manageable current account deficit, moderate inflation, and healthy foreign exchange reserves, which bode well for the economy. The growth drivers include favourable demographics, urbanisation, and improvements in education and skills, which boost productivity.

Regarding global trade dynamics, India is engaged in talks with the US and about 75 other countries are also in talks. I am hopeful that the impact of trade tariffs on our growth will be moderate. In our last monetary policy statement, we reduced the growth forecast by 20 basis points to 6.5%.

On inflation, the tariff situation has opposing impacts: increasing prices due to imported inflation and softening prices due to slower global demand. The latter has a higher impact, leading to overall lower inflation.

To adapt, we need to diversify our trade relationships while simultaneously integrating more into the global value chain. This requires improving our efficiency and productivity. It is also an opportune moment to focus on domestic growth drivers. The Union Budget’s focus on MSMEs, exports, agriculture, and investment is encouraging. The Budget also highlighted reforms, both at the central and state levels, financial and nonfinancial, as the fuel for growth.

What should the corporate sector do on the trade side to address these new dynamics?

The corporate sector needs to focus on improving productivity and efficiency. Simultaneously, it’s crucial to diversify and not be overly dependent on just one, two, or three countries. This is the time for diversification of the trade basket, country-wise and productwise, focusing on our strengths.

You mentioned India will be the fastest-growing economy for the next decade. What kind of growth do you project?

I would not like to give a specific number for the next decade. This year, we have projected 6.5% growth. Over the last decade, we grew at a CAGR of 6.6%. We aspire for a higher growth rate in the coming decade.

Do you expect any fiscal slippages due to recent geopolitical tensions requiring higher defence spending and potential impacts on customs revenue from the FTA concessions?

This govt has consistently delivered more than it promised on the fiscal deficit front. Last year, it projected a deficit of 4.9% (of GDP) but reduced it to 4.7%. A glide path was set to reduce the fiscal deficit to 4.5% by FY26, and they are projecting 4.4% for this year. Given this track record, while there may be minor slippages on some heads, they will be made good on others. Overall, I am confident they will be able to meet the targets.

A notable aspect is their continued focus on improving the quality of expenditure, alongside fiscal consolidation. Capital expenditure, including capital grants-in-aid to states has increased significantly from 2.6% of GDP in FY20 to a projected 4.3% in FY26.

Regarding customs, it constitutes a very small proportion of the total revenue of the Centre, just around 5.5-5.6%. Besides, the impact of FTAs on customs revenue is not immediate and comes with a lag.

RBI has injected substantial liquidity. Is that enough to stimulate demand?

Most economists believe that monetary policy’s impact on output or GDP is only in the short run. We have infused approximately Rs 9 lakh crore of durable liquidity into the banking system, which is currently in surplus. Our aim is to maintain adequate liquidity to facilitate the transmission of policy rate cuts across money, bond, and credit markets. We will continue to provide liquidity to ensure monetary transmission.

Given the 4% inflation projection and recent data, is there a case for faster interest rate cuts, especially with growth moderating compared to last year?

In the last Monetary Policy Committee (MPC) meeting, the stance was changed to accommodative. Going forward, this signifies either a status quo or a rate cut. The pace of any future cuts will be determined by MPC. The next meeting is from June 4 to 6, and it will not be appropriate for me to pre-empt its decision.

What is your approach to managing rupee volatility, given the recent turbulence in the foreign exchange market? Does the central bank assess the impact of a weaker dollar on exports, considering how rival currencies have moved?

India’s exchange rate policy has been consistent over the years. Our forex market is very deep and continuously deepening. RBI’s approach is to allow market forces to determine the price, given the depth of the market. However, RBI does undertake two-sided interventions, primarily to curb undue and abnormal volatility and ensure orderly movement of the exchange rate, thereby anchoring market expectations. We do not target any specific level or band for the exchange rate; that is our stated policy.

Regarding the impact of a weaker US dollar, other currencies are also appreciating. Therefore, the relative appreciation or depreciation of the rupee gains significance. While the Indian currency has appreciated slightly against the US dollar, it has depreciated against several others such as the Euro, Pound Sterling , and Mexican Peso. Conversely, it has appreciated slightly against the Chinese Yuan. We assess the impact on Indian exports within this broader context.

How do you protect people, especially senior citizens, who depend on fixed deposits in a falling interest rate regime? Do you think small savings instruments should be used to protect them?

It’s not appropriate to solely focus on the nominal interest rate; the real interest rate is more relevant. Nominal interest rates generally fall when inflation falls and rise when inflation rises, which is the purpose of monetary policy. For example, in 2023-24, inflation was 5.6%, and one-year bank deposit rates were around 7–7.5%. Now, inflation is projected at an average of 4% (currently 3.3%). So, even if deposit rates come down by 1–2 percentage points, in real terms, they will not have decreased.

Senior citizens already receive a higher interest rate from banks, typically 50 to 100 basis points more. Govt also offers various small saving schemes that aim to provide appropriate interest rates to savers.

How do you see the longer-term situation evolving on the deposit front, given the competition banks face from mutual funds and other instruments?

Yes, the proportion of people investing in different instruments is changing. However, there will always be a demand for both equity and debt. Cross-country experience shows that increased investment in equity is a positive development. These are cycles, and from an individual’s perspective, a good mix of investments is essential. Similarly, from a country’s perspective, a good mix of debt, equity, and various other instruments is essential, and I am confident this balance will be maintained going forward.

Are you speaking to private and public sector bank chiefs about overall governance issues, as lapses periodically come to light in various banks?

We have a very robust system of continuous supervision, both offline and online, especially for major banks. I have also met the CEOs of major banks. Wherever governance issues exist, we address them through our supervisory mechanisms.

IndusInd announced its results on Wednesday, and it took steps based on what RBI asked it to do. Is it the end of this episode?

As a policy, we do not comment on individual cases, but the system as a whole is very robust and strong. There are no systemic risks or concerns.

There are complaints of mis-selling of insurance-cum-investment products, especially by banks. How do you propose to tackle this?

We are indeed concerned about the complaints. RBI places great importance on fair practice codes, consumer protection, and customer service, including addressing concerns about mis-selling of financial products by banks and other financial institutions. Our regulations require banks to ensure the suitability and appropriateness of insurance products before selling them. They must also conduct a customer-needs analysis when selling investmentlinked insurance products. We have emphasised these points to the boards and senior management of our regulated entities. Mis-selling is a valid ground for escalating complaints under the RBI Banking Ombudsman scheme. Our supervisors specifically examine these aspects during their visits and inspections of banks. We are reviewing the situation and if required, we will consider additional measures to tackle this issue.

What is the progress on centralising KYC norms to simplify processes for customers, as mutual funds have had for a while, while banks still have missing aspects?

Customer convenience and service are a priority for us, and improving KYC processes is a key area. Our objective is twofold: first, that once a KYC is done by any regulated entity in the financial sector, the customer should not have to undergo KYC again when approaching another regulated entity. Second, if an existing customer updates his or her address with one regulated entity, he or she should not have to resubmit the same documents to other regulated entities of any financial sector regulator.

While there are thousands of regulated entities, the Central KYC Registry (CKYCR) was set up for this purpose. The CKYCR rules were amended to require regulated entities to first check for an existing CKYCR number for a customer before conducting new KYC or requesting more documents. Banks have been instructed to implement systems for this checking. This process should significantly resolve the issue of repeated KYC documentation and updates. We are working with banks to improve this process.

Is there a timeline for when centralised KYC will be fully operational?

We will be issuing certain guidelines on re-KYC shortly, perhaps in a few days, which should provide some relief. We have not set a specific timeline for CKYCR, but we aim to fully implement it as early as possible.

Cyberattacks have increased in the last few weeks, particularly postPahalgam. What measures are being taken, and what is your message to the public regarding the robustness of the systems at RBI, banks, and other financial entities?

We prioritise the cyber security of all our regulated entities and the payment systems maintained by RBI and NPCI. We have stateof-the-art cyber security defences that continuously monitor for any threats. Our teams regularly visit, supervise, and inspect the IT systems of regulated entities, especially major banks. We are also in constant contact with law enforcement and intelligence agencies like IB and CERT-In for information. We are fully alert on this front. It is a crucial topic requiring collective and collaborative effort, not just from regulated entities but also from customers. I urge all customers and regulated entities to maintain the highest vigilance in this regard. Our systems are robust enough to withstand such attacks.

What is your message to customers regarding frauds?

RBI and banks are taking several measures such as conducting awareness programmes to educate customers. Customers, on their part, need to be very vigilant and cautious. Many large-amount frauds occur where gullible people fall prey to schemes promising huge returns. Another common method involves people sharing their credentials. So, people must be very cautious in all these ways.

What about mule accounts, which are often used in cybercrimes?

We have advised banks to be proactive in monitoring transactions and to investigate any suspicious ones. Additionally, the RBI Innovation Hub has developed ‘MuleHunter.ai™’, a supervised ML model designed for near real-time identification of mule accounts. This is being tested in a few banks and has shown good results. We are encouraging more and more banks to adopt this to pre-emptively identify and close or inactivate these mule accounts.

Are you worried about the concentration of market share in UPI ? How do you respond to demands from banks to make UPI remunerative?

There are about 40 third-party application providers (TPAPs) in the UPI ecosystem, so the concentration risk is not a major issue. Moreover, these TPAPs do not handle money; they only transmit it. Additionally, there are alternative channels available to citizens, such as RTGS and NEFT , not just UPI. UPI itself is a very robust system, and we will continue to strengthen our payment systems further.

Given recent enforcement actions, including monetary penalties and management changes at banks due to governance lapses, what are the criteria for imposing business restrictions or operational curbs? How do you ensure proportionality in these actions?

Our supervisory actions are always intended to serve the overall interest of the regulated entity and the stability of the financial sector. The intent behind imposing penalties or taking action is to correct the infringer and deter others, sending a signal about areas of concern. We have a very calibrated approach; not every infringement leads to punishment. We have internal guidelines that determine when and to what extent a penalty is imposed. Business restrictions are a last resort, applied only when deviations are materially significant, against the public interest, or threaten financial stability. Even then, regulated entities are given sufficient time to correct issues, and restrictions are imposed only if they are not addressed after being repeatedly flagged. RBI acts like a guardian; the overall interest of the regulated entities and customers is paramount. Sometimes, harsh actions are necessary, but they are always in the best interest of the entity, intended to correct and improve, not to punish. This approach will continue to guide us.

India seems to have a large number of banks but not enough large banks. Do you see a need for more efforts to increase their size and scale, possibly through more mergers, to compete globally?

Since common people entrust their hard-earned money with banks, it is imperative that these banks are owned and managed by people who command trust. This means owners and managers must have expertise in managing financial institutions and banks, along with a good track record, reputation, and impeccable credentials. We have a policy where payment banks and cooperative banks can transition into small finance banks, and small finance banks can transition into universal banks. We are currently examining this policy to ensure a sufficient number of banks, given the increasing needs of our country.

The private banking shareholding norms were revised. Is there a case to increase shareholding limits further, especially for foreign banks wanting to come to India?

We are examining this in totality as part of our internal examination. We will review all aspects of the eligibility conditions.

There was mention of a possible case for more relief for senior citizens regarding deposit insurance. Is there a proposal for enhanced deposit insurance or group-sold accounts?

As of now, there is no such proposal. The deposit insurance coverage is Rs 5 lakh, which was increased from Rs 1 lakh about five years ago. This covers more than 97% of the accounts.

RBI’s scale-based regulations require large finance companies to list. Some companies are seeking more time.
Sufficient time, around five years, is given for them to list. This has not been highlighted as a major concern. Those companies that are not deposit-taking and do not fall under the umbrella of regulations are not required to list. However, whether a company is deposit-taking or not needs to be examined.

You are completing six months at RBI. What would be your priorities? Do you see a need to retain or realign RBI’s multiple roles?

Our primary mandate is stability while keeping growth in mind. My priorities will be twofold: first, improving customer protection and service, and second, enhancing the strength, profitability, and resilience of the institutions providing these services. Technology will be a key driver for this. Additionally, we will focus on striking a balance in our regulatory approach to ensure that regulatory burden is appropriate.