RBI Governor Sanjay Malhotra: US Fed chair doing good job, central bank independence important
'I don't think he needs advice. I think he is doing a very good job. Maintaining the independence of the central bank is very important. I think he has done a commendable job,' Malhotra said on Friday, when asked what advice he would give Powell to deal with Trump.
He was responding to a question asked by Anant Goenka, Executive Director, The Indian Express Group, at the Financial Express Modern BFSI Summit in Mumbai.
'I may mention that we were there in the IFMC about a couple of months ago in Washington, where the finance ministers and central bankers of the top 30-40 countries were present. And every governor and finance minister gets a chance to speak on the economy and what's required to be done. There were some 40-50 speakers. Jerome Powell was also there and he spoke about what he was doing about central bank independence, and out of everyone, he was the only one who got a roaring applause. No one else,' Malhotra recalled.
Since taking over as the US President in January this year, Trump has targeted Powell repeatedly. He has criticised Powell for not cutting interest rates, and called him a 'numbskull'. Last month, Trump said he was considering the possibility of replacing Powell and had three-four potential candidates. On Thursday, Trump and Powell sparred over the renovation costs of the Federal Reserve's headquarters in Washington.
Earlier in the day, at a fireside chat with Shyamal Majumdar, Editor, Financial Express, the RBI Governor said the war against inflation is an ongoing process and the central bank would continue to keep an eye on it. He said the RBI was soon going to come out with a discussion paper on flexible inflation targeting (FIT) framework, which is due for a review.
Headline inflation, as measured by y-o-y changes in the all-India consumer price index (CPI), declined to 2.1 per cent in June 2025, the lowest since January 2019, compared to 2.8 per cent in May. Retail inflation remained below the 4 per cent target for the fifth consecutive month in June.
'It's (inflation below 4 per cent) not a permanent victory. It is a victory, it's a battle won, but the war against inflation continues. We never let our eyes off inflation. Our primary objective is to maintain price stability,' Malhotra said when asked about his major worry now that the RBI seems to have won the war against inflation.
Malhotra said the RBI's other objective was growth, which is also a prerequisite for a stable economy. 'History tells us (that in) various economies, wherever there has been very high volatility and inflation, growth has suffered,' he said.
To a question on what the RBI's Monetary Policy Committee (MPC) philosophy would be when it is certain that inflation is going to be below 3.7 per cent in FY2026, he said the rate-setting panel would look at the data that comes in and take a final call.
'Even though 3.7 per cent is the average (inflation) for this year (FY26), the Q4 (estimate of 4.4 per cent) may be revised downwards, given the fact that the numbers that are coming in are lower than what we had projected even for Q1. We will see how it (Q4 inflation print) gets revised. So, monetary policy, being data-driven, will be guided by the revised numbers, if any,' he said.
He reiterated that the change in monetary policy stance to 'neutral' in the June policy gives the MPC the flexibility to move interest rates in either direction, or even to go for a pause. His statement comes a few days ahead of the next monetary policy meeting, scheduled on August 4-6.
Asked if a rate cut in the near future was not ruled out, Malhotra said it was for the monetary policy committee to decide. He, however, highlighted that a neutral stance does not mean a reversal of the easing policy, a rate cut can still be there.
'We have the flexibility to move up, down, or pause. Yes, it does mean that the bar for further easing is higher than it would have been if it was accommodative, which was a clear signal for further easing,' he said.
Malhotra described the flexible inflation targeting (FIT) framework as a success, because it has resulted in a moderation in inflation to an average of 4.9 per cent since the regime's introduction in 2016.
Under this framework, the RBI has been mandated by the government to maintain CPI at 4 per cent with a band of +/-2 per cent.
He said the framework is due for a review, and the RBI will soon be coming out with a discussion paper on it. The government, in consultation with the RBI, revisits the inflation target under the FIT regime every five years.
'We will invite suggestions from all the stakeholders, and will give our comments to the government. The final call has to be taken by the government as to what the particular target or the benchmark should be for the flexible inflation targeting,' he said.
On tepid growth in bank credit and private investments, Malhotra said the monetary transmission is happening and this will support growth in the near term. The MPC has cut the repo rate — the key policy rate — by 100 bps between February-June 2025. The repo rate was reduced by 25 bps each in February and April monetary policy meetings, and by 50 bps in the June policy.
'Within two months of our 50 basis point cut (25 bps each in February and April policy), the whole of the monetary policy transmission has happened. So all these things will actually help further in improving credit and improving growth,' he said.
Like for corporates, Malhotra also expressed reservations about allowing non-banking financial companies into the banking space. He said the eligibility criteria for a company or for an NBFC is not very different.
'If a large industrial house is doing financial activities and real economy activities within the same group, there is an inherent conflict of interest, with the group actually dealing with the money of the depositors. So those concerns are valid, and they continue to remain,' he said, when asked if the RBI was open to allowing NBFCs to enter the banking space.
He noted that there was no proposal at present to allow corporates, whether through NBFCs or as an individual company, to get a banking licence.
Malhotra welcomed the India-United Kingdom (UK) bilateral free trade agreement (FTA), saying the deal would give a boost to the domestic manufacturing and services sectors. 'Hopefully it (India-UK free trade agreement) should help us. I think that is the way going forward now, because unfortunately multilateralism seems to have taken a back seat. So I think in that sense, it's good that we already have one FTA in place,' Malhotra said. He also emphasised the need for more such deals and said the agreement with the US is in advanced stages.
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