Tariff troubles: Despite resilience, India facing global headwinds, says RBI chief
Virendra Pandit
New Delhi: Reserve Bank of India (RBI) Governor Sanjay Malhotra has said although the Indian economy is resilient, it is facing global headwinds.
In his keynote address at the ongoing 24th Fixed Income Money Markets and Derivatives Association of India-Primary Dealers’ Association of India (FIMMDA-PDAI) Annual Conference in Bali, Indonesia, he stressed the need to boost liquidity in the government securities (G-Sec) market, improve forex pricing transparency for small customers, and deepen India’s term money markets.
The conference is being held from April 17 to 20, with a full day event on April 18.
While the Indian economy and the financial markets have demonstrated remarkable resilience, they are not immune to the vagaries of an uncertain and volatile global environment, he said, adding the GDP growth is much below what India aspires for.
“As I mentioned in my statement post the recent monetary policy announcement (April 9), our domestic growth-inflation balance has improved significantly.
“There has been a decisive improvement in headline inflation which is projected to remain aligned to the target of 4 percent in FY26. Global uncertainties and weather disturbances, however, pose risks to the inflation outlook,” Malhotra said, according to the media reports on Saturday.
He emphasised that even though RBI has projected a somewhat lower real GDP growth for FY26 at 6.5 percent, India is still the fastest-growing economy in the world.
“Yet, it (GDP growth) is much below than what we aspire for. We have reduced repo rates twice and provided sufficient liquidity. In view of the rapidly evolving situation, especially on the global front, we are continuously monitoring and assessing the economic outlook. We will be agile and proactive in our actions on the policy front, as always,” he said.
A February 2025 World Bank report noted that India will need to grow by 7.8 percent on average over the next 22 years to achieve its aspirations of reaching high-income status by 2047.
Malhotra said the G-Sec market is among the most liquid markets globally, as evidenced by low bid-ask spreads and low impact costs.
However, the turnover ratio (the annual turnover to outstanding stock of securities) of dated G-Secs has remained modest at just over one. If the less liquid state government securities (SGSs) are included, the ratio falls even below one.
He observed that liquidity continues to be concentrated in a few securities, thinning out for longer maturities. Also, secondary market trading is dominated by banks and primary dealers, with many large institutional investors remaining “buy-and-hold” investors.
Of the more than 3,000 institutional investors in G-Secs, the top ten participants contributed a third of the overall turnover during 2024.
The RBI chief emphasised that one continuing endeavour of the central bank has been to increase retail participation in the G-Sec market, with the launch of the ‘RBI Retail Direct’ facility in November 2021 being a key initiative in this direction. A mobile app for Retail Direct was recently introduced. RBI also permitted retail clients of SEBI-registered non-bank stockbrokers to access NDS-OM.
“All of this makes it imperative to ensure that sufficient secondary market liquidity is available to such investors to participate in the market at reasonable prices.
“Liquidity and pricing also need to improve for participants like cooperative banks, pension and provident funds with smaller deal sizes. Banks and primary dealers may need to play a much more active role to this end,” he said.
Malhotra noted that fair treatment of customers and transparency in forex pricing for smaller and less sophisticated customers continue to attract the RBI’s attention. Much more can and needs to be done here.
“Divergence in pricing in FX markets for the small and large customers are far wider than what can be justified by operational considerations. FX-Retail, a transparent platform for undertaking FX transactions, has witnessed a lukewarm response and our feedback is that this is largely due to the reluctance of banks to offer the platform to their customers,” he said.
Malhotra underlined that regulations are in place to ensure transparency in pricing for retail customers, including a mandate to disclose the mid-market or interbank rate to customers. As an industry, market-makers should introspect and assess how they can effectively deliver on these regulatory and fiduciary mandates.
The RBI Governor underscored that the dwindling liquidity in the call money market – whose rate is the operating target for monetary policy – also requires attention. This market is also critical for the robustness of the MIBOR (Mumbai Inter Bank Offered Rate), the benchmark for the interest rate derivative market.
Also of concern are the asymmetries that occasionally arise between different money market rates—the rate at which RBI provides liquidity, the call money rate, the market repo rate, and the TREPS (Treasury Bills Repurchase Agreement) rate.
Malhotra said this calls for more proactive functioning by banks – the entities with sole access to RBI’s liquidity facilities, the call money market and the repo markets – to ensure that RBI’s liquidity measures are promptly and seamlessly transmitted to the broader market.
