Reserve Bank of India (RBI) Governor Sanjay Malhotra on Wednesday said it was premature to discuss interest rate hikes, noting that the central bank was monitoring the impact of higher crude oil prices on inflation before taking a view on the policy path.
“If we wanted to prepare the market for rate hikes, we would have changed stance from neutral to restrictive,” Malhotra said while speaking to ET Now.
On India’s external position, Malhotra said the economy was in a much stronger position than during the 2013 taper tantrum episode. He said the current account deficit stood at around 0.6 per cent in the previous financial year against nearly 5 per cent in 2013, while foreign exchange reserves currently provide more than 10 months of import cover.
The governor said India’s foreign exchange reserves were equivalent to about 89 per cent of external debt and exceeded the International Monetary Fund’s (IMF’s) reserve adequacy metric. He added that both the current account and capital account remained resilient.
Referring to India’s inclusion in global bond indices, Malhotra said most measures required for index inclusion had already been completed.
And, some investor-friendly steps aimed at easing investments were either under implementation or expected to be rolled out over the next few weeks.
On the domestic economy, the governor said investment activity remained healthy despite global uncertainties. He pointed to growth in fixed capital formation and investments across sectors such as defence, renewable energy, hospitality and shipbuilding.
He also acknowledged that geopolitical tensions and trade-related uncertainties continued to weigh on sentiment.
Malhotra said there was scope for investment activity to accelerate further as uncertainty eased.
He added that capacity utilisation levels remained high and financing conditions were conducive, with credit, equity capital and internal cash flows available to support expansion.
Addressing concerns over the migration of household savings towards capital markets, Malhotra described the trend as healthy and said diversification of savings was beneficial for both households and investment financing.
He noted that bank deposit growth had improved to around 12 per cent and did not pose a constraint to credit growth.
The governor also defended the adequacy of banking system resources, saying banks remained well capitalised and liquid. “It is credit which creates deposits,” he said, arguing that lending capacity was ultimately constrained by capital and liquidity rather than aggregate deposit growth.
On the RBI’s reserve management strategy, Malhotra said investments were guided by the principles of safety, liquidity and returns.
Gold holdings, he said, were primarily intended to meet diversification and stability objectives rather than to benefit from price movements.
Providing an update on the central bank digital currency (CBDC) project, the governor said the pilot now had more than 10 million users and had processed transactions worth around ~38,000 crore.
He said the RBI would continue to focus on improving interoperability, expanding programmable CBDC use cases and advancing work on wholesale and cross-border applications.
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