MUMBAI: Reserve Bank governor Sanjay Malhotra expects the interest rates regime to remain “low for a long period" as the economy remains robust and could receive a boost from trade deals with the US and Europe.
The central bank's projections suggest that the interest rates "should remain low for a long period of time", Malhotra, who has delivered four rate cuts totalling 125 bps since he assumed charge on December 10 last year, told the British financial daily the Financial Times published Wednesday. The RBI-led Monetary Policy Committee had unanimously cut the repo rate by 25 basis points to 5.25% earlier this month “to support a goldilocks economy”, and many analysts see the terminal rate is 25 bps down from the present level.
However, the governor was quick to note that RBI's economic forecast does not take into account the potential effect of trade agreements with the US which has been pending since July and the almost completed pact with the European Union.
"The impact of the US trade deal could be as much as about half a percentage point," the governor said.
Malhotra said the most recent headline GDP figure wherein the economy sprinted at heavily surprising 8.2% in the September quarter was “surprising" and that the central bank which had predicted 7% annual growth in the September quarter had to "improve our forecasting". The economy delivered a solid 8% growth in the first half leading to an upward revision by the RBI as well as others to forecast a 7.5% clip for the full fiscal.
The world's fifth-largest economy is under pressure from punitive 50% tariffs imposed by US, widening its trade deficit and pushing its currency to a record low which had plunged to 91.14 to a dollar Tuesday losing over 6.2% year to date.
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Amid questions over the quality of official data (the latest being the IMF questioning the forex rates), Malhotra said "some margin of error will always be there because these figures do get revised". He pointed out that these margins of error should always be kept in mind while making any policy. "Otherwise I think the figures are quite robust."
The IMF had last month reclassified the country’s forex regime as a "crawl-like arrangement," reflecting the RBI's move towards greater rupee flexibility and allowing more volatility to absorb shocks, shifting from the previous "stabilized" tag, as seen in their November 2025 report. While the RBI still intervenes to curb extreme swings— like it did todya helping the rupee gain 1.03% earlier in the day making it the best single day rally in seven months— this new classification acknowledges the rupee's increased volatility and aligns with the fund recommendations for more exchange rate flexibility, a change observed under Malhotra.
"Crawl-like” means the exchange rate moves gradually, allowing for small adjustments (within 2% of a trend) while managing volatility, rather than targeting a specific rate.
The Reserve Bank emphasizes managing "excessive volatility" without targeting a fixed level, allowing the rupee to trade more freely.
The rupee's one-year realized volatility has risen above 5% under the new leadership, compared to under 2% previously, noted by the IMF.