On the 18th floor of the Reserve Bank of India’s (RBI) Mumbai office tower, governor Sanjay Malhotra is mindful of the legacy of the illustrious institution.
For the 26th governor, the choice between growth and inflation is crystal-clear: “For us, it’s always inflation,” Malhotra told Mint at his office, seated before a wall with framed photographs of his predecessors, from the first governor Sir Osborne Smith who took charge in 1935, to his immediate predecessor Shaktikanta Das, who left in December 2024.
Malhotra asserted that the central bank will do “whatever is required” to ensure orderly price discovery in the forex market. In a wide-ranging interview, the governor touched upon India’s current account deficit, inflation, the trajectory of the rupee, and what keeps him awake at night. Edited excerpts:
The Indian rupee is approaching 100 to a dollar, and Dr Arvind Panagariya, chair of the 16th Finance Commission, suggests that RBI shouldn’t worry too much about this decline, viewing 100 as just a number. What are your thoughts on the rupee’s depreciation?
Our policy remains the same. We do not target any price or level or band. It is only abnormal and high volatility that we try to curb, so as to have an orderly movement in the forex market.
But, yes, if there is undue speculation getting built, then we are certainly there to bring order. As you saw in March, some regulatory measures were taken in response to speculation. Let me emphasize—we will do whatever is required to ensure orderly price discovery in the forex market. We have enough tools in our kit. We have sufficient forex reserves—$700 billion or so—and other measures that we can deploy to quell any undue speculative movement.
On another note, with the recent depreciation, it would be reasonable to think that rupee is not overvalued. If anything, one could argue that rupee has become undervalued, both in nominal as well as in REER (real effective exchange rate) terms. Once the situation in West Asia normalizes, one could very well see the rupee appreciate, as it has during the past similar episodes of external-shocks-driven volatility.
In the same breath, I would also like to underscore that the country’s macro fundamentals are very strong. Growth is higher than in most other economies. Inflation is also low as of now. Our most recent projections for inflation and growth were 4.6% and 6.9%, respectively. We will be revising the projections, of course, given the evolving conditions.
Higher crude prices will impact the current account deficit. How do you see capital flows and the overall balance of payments situation?
On the current account side, there would be pressure due to elevated crude prices. However, growth in gold imports may not show the same momentum as gold prices may not appreciate as much as in previous years. Services exports should continue to be resilient. Indications are that the impact of the West Asia war on remittances would be minimal. Overall, there would be a moderating influence on our current account deficit.
On the capital account side, gross capital flows have been robust. Gross FDI (foreign direct investment) inflows reached a historical peak of $94.5 billion in 2025-26, higher by 17% over 2024-25. This is an indication of our attractiveness as an investment destination. For BoP () purposes, however, it is the net FDI, which is more relevant. It is primarily because of higher repatriations and ODI (overseas direct investment) that our net numbers have not been as encouraging as the gross numbers. But, even on a net basis, we are witnessing improvements. In 2025-26, India’s net FDI flows stood at $7.7 billion, higher than $1 billion in 2024-25. Going forward, I expect the outflows to moderate, especially the repatriations, as equity valuations have largely corrected. So, there is a good possibility for a better capital account this year.
More importantly, we have never allowed a crisis to go to waste. We need to—and I am confident that we shall—use the West Asia crisis too as an opportunity and expedite measures for energy security and the long-term improvement of our BoP. So, I’m quite optimistic about having a manageable BoP, going forward.
There are significant concerns about the rupee, particularly regarding the Reserve Bank of India’s interventions and their impact on our foreign exchange reserves. Former governor D. Subbarao points out that these actions are self-defeating, that we must allow the rupee to move according to its natural mandate. What is your take on this?
As I have mentioned, we let the markets find the price level. We don’t target any specific level or band. But if there is undue speculation, it is our duty to quell it. It is important to ensure that exchange rate adjustments are orderly and not disruptive of economic activity. In this regard, we will use all instruments to ensure smooth exchange rate adjustment that reinforces financial stability. Intervention is also acknowledged and accepted as a legitimate tool by the International Monetary Fund (IMF) in its integrated policy framework of 2020 for such purposes.
And it is for this purpose that we sometimes use our reserves. As already mentioned, we have sufficient reserves to curb undue speculation and reduce abnormal or high volatility.
Given the global scenario, is there not a major concern about this BoP deficit?
It’s not an undue concern, yet it requires some attention in the form of concerted efforts by the government, RBI and all institutions concerned. More than short-term measures, it requires long-term measures, which we need to work on and continuously improve, as we have a current account deficit.
We have been taking measures in this regard. The West Asia crisis highlights the need to further strengthen efforts aimed at enhancing competitiveness and exports, reducing import dependence and attracting capital.
We need to take measures to reduce our current account deficit, which the government has been addressing, especially by improving our exports. The government has signed many free trade agreements, which should help, along with the production-linked incentive schemes. On the import side, especially for crude, we are trying to increase our own capacity, diversify our sources, reduce our energy intensity, improve energy efficiency, advance the energy transition, and increase ethanol blending.
Similarly, the capital account also needs improvement. It’s pertinent to mention that we are a country. This implies that we borrow money through the capital account to fund our current needs.
While this is natural for a developing country which needs higher investment, it is critical that we spend this borrowed money efficiently, as it has to be paid back over a period of time. Therefore, especially in the current context of some pressure on BoP, the call of the honourable prime minister for cutting down on unessential spending on forex and the increase in customs duties on gold are steps in the right direction.
Given the measures on the investment account and capital account, including the free trade agreement (FTA) with New Zealand, announcements by tech giants, the AI summit, and ease of doing business, what is the government doing?
On the capital account, the FTA with New Zealand contains a commitment of around $20 billion investments over a 15-year period. There is an investment commitment of about $100 billion in the Trade and Economic Partnership Agreement (TEPA) with the European Free Trade Association (EFTA). The Government of India held the AI (artificial intelligence) summit recently. It has also attracted multiple investment commitments. In addition to it, the government has set up a committee to explore how to facilitate the ease of doing business. I think we need to continue improving the ease of doing business, especially for foreign investors.
Microfinance institutions (MFIs) have been facing funding problems for a long time. Any planned revision in their guidelines?
We have taken some measures earlier to improve the financial health of MFIs, such as reducing risk weights. And then, we also reduced the qualifying asset threshold criteria for MFI classification. Accordingly, some flexibility was given to the MFIs to diversify their portfolios and strengthen their financial positions.
Importantly, we are in constant engagement with them, and we will initiate reform measures, as required. I want to emphasize that MFI is a very important sector for us. They serve a large number of borrowers in a niche segment. In terms of value, credit to microfinance sector may not be very high; it would be roughly about ₹5.5 lakh crore ( ₹5.5 trillion). But in terms of numbers, it is estimated that the segment may have over 10 crore loan accounts.
Markets have been pricing in a rate hike. Yields are pricing in some rate hike. The overnight index swap curve has also been indicating a rate hike. There is divergence between markets and the RBI. What messaging do you want to give to markets?
It’s still an uncertain world. We are waiting for data, and we continue to monitor the situation. When I say data, it’s not only the present data, but more importantly, the outlook. As I have said earlier, unless the supply shocks lead to second-order effects and inflation gets generalized and entrenched, monetary policy prefers to wait. We are in a neutral stance. So, we do have the flexibility.
In these unusual times, is inflation a priority or growth?
For us, it’s always inflation. Our primary mandate is inflation. It is price stability. And it continues to be price stability, while keeping in mind the objective of growth. If the evolving inflation trajectory provides policy space, we support growth.
The prime minister and many industry leaders have flagged the seriousness of the current crisis. How do you view this?
The positive side is that our starting point is very good. Because, as I said, the macroeconomic fundamentals, including our external account, are much more robust than they have ever been before. And it matters where you are starting from. However, as I said, it certainly requires some attention. It requires concerted efforts from all the stakeholders. It does require us to continue our efforts with more vigour and purpose to improve our BoP and enhance our energy security.
What is the current RBI stance on cryptocurrency?
The government will be coming out with a discussion paper. Let’s wait for that. We have shared our detailed comments with them.
Any update on India’s central bank digital currency (CBDC)?
CBDC is gradually gaining momentum. The retail CBDC pilot now includes 19 banks and two non-bank entities, with over 1 crore users onboarded. On the wholesale side, cumulative trade till date is roughly ₹9 lakh crore.
CBDC has many primary use cases. One is in cross-border payments space, potentially minimizing time and cost. The other use case of CBDC is making more targeted payments because of its programmability feature. We are running many projects with governments, including student loan subsidy support, food distribution, agriculture and irrigation schemes, skill vouchers and hostel expense support, welfare payments, etc. Three, it is also an alternative to other electronic payment methods. As of now, we are testing and improving the technical architecture of this CBDC.
Any set timeline for the pilot programme for both wholesale and retail?
Insofar as retail is concerned, we already have a huge infrastructure in the form of UPI (Unified Payments Interface). As regards cross-border payments, we are pursuing bilateral and multilateral collaboration with some countries and also participating in BIS Innovation Hub projects to improve international payments efficiency. Such projects require international coordination. And so, any timeframe will have to be seen in this context.
The yield on 10-year government securities is over 7%. How comfortable is RBI with that, and would you want it to be lower?
These prices are determined by market forces. And we believe that an efficient market determines these prices right now. To some extent, bond yields the world over are elevated because of uncertainty and fiscal imbalances in advanced economies. Bond yields in India, relatively speaking, have hardened less, in comparison to many other countries.
Your comment on the recent circular on the listing of non-banking financial companies (NBFCs)?
I think what you are talking about is our circular on type-I NBFCs. Type-I NBFCs are those that do not have access to public funds and do not have any customer interface. To remove regulatory burden from such entities, we have exempted them from mandatory registration with RBI if they have asset size of less than ₹1,000 crore.
How does RBI propose to deal with the menace of mule accounts?
We have launched MuleHunter.ai to deal with mule accounts. It is an artificial intelligence/machine learning-based solution to detect mule accounts with high precision, reducing the burden of manual investigation and improving the quality of alerts. As of end-April, the solution is live in 26 banks.
In addition, we are also running re-KYC campaigns extensively throughout the country. Such campaigns will also likely screen out mule accounts from the system.
What is the progress of initiatives in internationalizing the rupee?
INR internationalization is a long-term project, which takes several decades to deliver results. The objective of such internationalization efforts is to promote greater use of INR for international trade settlement as well as for all cross-border transactions, including investments and personal remittances. Several facilitative steps have been taken by the RBI in this regard.
We are also entering into local-currency arrangements (LCAs) to enable invoicing, payment, and settlement in local currencies while focusing on improving efficiency, reducing exchange risks, and lowering transaction costs. As on date, we have LCAs with four countries—the UAE, Indonesia, the Maldives and Mauritius.
How do you keep yourself stress-free with so much pressure? Work-life balance?
If you enjoy your work and look forward to going to the office every day, then there is no boundary between work and life which is to be balanced. Work is stressful and needs to be balanced, only if one does not enjoy it.
There is talk about five-day banking. What is your view, especially with the digital banking push?
I assume this is with respect to public sector banks. This is a decision the government makes, keeping in mind the best interests of the consumers and the employees.
What keeps you awake at night?
RBI is always up. As central bankers, it is our job to worry. What engages our attention is monetary policy, and how to conduct it to ensure price stability. Our core objectives are price and financial stability. So, obviously, these are the things that are always running through our minds, and whatever affects them keeps us busy and awake.