India faces global headwinds despite economic resilience: RBI Governor

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, according to RBI Governor Sanjay Malhotra. He noted that the GDP growth is much below what India aspires for.

“As I mentioned in my statement post the recent monetary policy announcement (on April 9th), 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 per cent in FY26. Global uncertainties and weather disturbances, however, pose risks to the inflation outlook,” Malhotra said in his keynote address at the 24th FIMMDA-PDAI Annual conference in Bali.

The Governor emphasised that even though RBI has projected a somewhat lower real GDP growth for FY26 at 6.5 per cent, India is still the fastest-growing economy.

“Yet, it (GDP growth) is much below 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 per cent on average over the next 22 years to achieve its aspirations of reaching high-income status by 2047.

Issues & Concerns: G-Sec market

The Governor noted that the Government Securities (G-Sec) market is perceived as one of the most liquid markets globally, as evidenced by low bid-ask spreads and low impact costs.

However, the turnover ratio (measured as the annual turnover to outstanding stock of securities) of dated government securities has remained modest at just over one (1). If the less liquid state government securities (SGSs) are included, the ratio falls below one (1).

Malhotra observed that liquidity continues to be concentrated in a few securities, thinning out for longer maturities. Further, secondary market trading is dominated by banks and primary dealers, with many large institutional investors remaining “buy-and-hold” investors.

Of the 3,000 plus institutional investors in G-Secs, the top ten participants contributed a third of the overall turnover during 2024.

The Governor emphasised that one continuing endeavour of the Reserve 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 one initiative in this direction.

A mobile app for Retail Direct was recently introduced. RBI also recently 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.

Forex market

Malhotra noted that fair treatment of customers and transparency in forex pricing for smaller and less sophisticated customers continue to attract our 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.

The Governor highlighted 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 need to introspect and assess how they can effectively deliver on these regulatory and fiduciary mandates.

Referring to RBI’s recent announcement that access to FX Retail will also be provided through the Bharat Connect platform, he said that in the first phase, a pilot to facilitate individual purchases of US dollars is planned. Subsequently, its scope will be expanded based on the experience gained.

Malhotra appealed to all the financial market participants, including Authorised Dealers, to extend their full cooperation in ensuring the pilot is implemented smoothly and successfully.

The Governor observed that RBI continues to see banking channels being used for activities on unauthorised FX trading platforms. He emphasised that this calls for greater vigilance and stronger efforts by banks to create awareness among their customers about the perils of using such platforms.

Money markets

Referring to the country’s money markets remaining almost entirely overnight, Malhotra said that despite many efforts over the years to develop a term money market, for example, by removing statutory pre-emptions on inter-bank liabilities and by conducting term repos/reverse repos of varying maturities, term markets remain missing, especially in the three-day to three-month segment.

“Though alternatives such as overnight indexed swap rates and yields on treasury bills are being used, there remains a need for the development of a risk-free term structure to act as a benchmark for pricing of interest rate products, including loans,” he said.

The 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.

Published on April 19, 2025