Rate-cut room intact, signals RBI governor Malhotra; bond yields decline

These comments come a week ahead of the meeting of the six-member monetary policy committee that starts from December 3. The decision in the meeting will be announced on Friday, December 5

The yield on the 10-year benchmark government bond fell on Monday, after Reserve Bank of India (RBI) Governor Sanjay Malhotra said the scope for further rate cuts — as indicated during the October monetary policy meeting — had not diminished, as suggested by the latest data. He added, however, that the rate-setting panel would take a call on timing.

 

His comments come a week ahead of the meeting of the six-member Monetary Policy Committee (MPC), which begins on December 3. The policy decision will be announced on December 5.

 

“In the October MPC meeting, it was clearly communicated that there was room for rate cuts. Since then, based on all the economic and macro indicators available, including inflation, we do not see any signals suggesting that this space has diminished. So yes, there is certainly room. But whether the MPC decides to act on it in the upcoming meeting will depend on the committee’s assessment at that time,” Malhotra told Zee Business in an interview.

 

The domestic rate-setting panel cut the policy repo rate by a cumulative 100 basis points in the first half of 2025, but maintained a pause in the August and October policy reviews.

 

The yield on the benchmark 10-year government bond fell following the comments, settling at 6.52 per cent, against the previous close of 6.57 per cent.

 

Addressing recent pressure on the rupee, Malhotra said the currency typically depreciates about 3 per cent–3.5 per cent a year. He explained that the RBI’s priority is to manage sharp swings in the exchange rate rather than hold the rupee at any particular level.

 

“Regarding the rupee’s depreciation, the decline in value is natural. Over the long run, not in the short term, currency movement aligns with inflation trends. Ultimately, what matters is the currency’s purchasing power, whether it is the dollar, pound or euro. As long as our inflation remains higher, some depreciation over the long run is natural for us,” he said.

 

“As for what level of depreciation is appropriate or comfortable, historically the rupee has weakened by about 3 per cent-3.5 per cent annually. Our effort is always to ensure that whatever depreciation occurs remains orderly and controlled,” he added.

 

Malhotra also said that over the past eight years the RBI had purchased around 300 tonnes of gold, taking its total holdings to about 880 tonnes. Gold now accounts for roughly 15 per cent of India’s foreign exchange reserves, or about one-sixth of the total. He added that the overall position of India’s foreign currency and gold reserves remained very strong and healthy.

 

On foreign investments, he said that while benchmarks such as the Bank Nifty were not the only measures to assess investor activity, both domestic and foreign investors continued to participate, and the RBI welcomed their presence.

 

He added that the regulatory ecosystem had been designed with safeguards to ensure that foreign participation did not adversely affect the domestic banking system. At present, he said, the influence of foreign entities remained very limited and was not a cause for concern.

 

“While the Bank Nifty is not the only benchmark we should rely on, investors are participating, both domestic and foreign, and we welcome that. We have absolutely no hesitation on this front. Foreign banks account for less than 7 per cent of total banking loans, assets and foreign assets, compared with the 15 per cent limit we have set for foreign bank branches, so there is still ample space,” he said.

 

“In short, the ecosystem we have created, and the measures we have put in place, ensure that foreign participation does not adversely impact our banking system. At present, their influence is very limited and not a matter of concern for us,” he added.