India’s 6.5% GDP growth projected for FY26, despite global challenges: RBI Governor Sanjay Malhotra

Amid the ongoing tariff war, Reserve Bank Governor Sanjay Malhotra said the central bank will keep a close watch on the rapidly evolving global landscape and remain “agile and proactive” in its policy moves. While the Indian economy and financial markets have shown remarkable resilience, he warned they are not immune to global uncertainties and volatility.

“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 policy actions,” Malhotra said at the 24th FIMMDA-PDAI Annual Conference in Bali on Friday.

Inflation outlook steady, but global risks remain

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He said the growth-inflation balance has improved considerably, with headline inflation projected to align with the 4 per cent target in FY26. However, global headwinds and weather-related risks could still affect this outlook.

“Even though we have projected a somewhat lower real GDP growth for FY26 at 6.5 per cent, India is still the fastest growing economy. Yet, this is below our aspirations. We’ve already reduced repo rates twice and ensured sufficient liquidity,” he added.

Financial markets stable; g-sec borrowings smooth

Malhotra noted that all segments of India’s financial markets, including forex, government securities, and money markets, have largely remained stable. Though the rupee faced some pressure a few months ago, it has since regained ground.

While equity markets saw corrections and capital outflows—similar to other emerging markets—the government securities market stayed steady. The combined borrowings of the central and state governments, totalling Rs 24.7 lakh crore in FY25, were conducted without any disruption.

Borrowing costs for the Centre fell by 28 basis points to 6.96 per cent in FY25, compared to 7.24 per cent in FY24. Secondary market activity in government securities remained robust, buoyed in part by India’s inclusion in global bond indices.

Malhotra said markets have evolved within a regulated framework and adapted to changing regulatory approaches. The forex market, in particular, has become more transparent and liquid, with narrow bid-ask spreads.

He also addressed the extension of forex trading beyond standard hours since January 2020. While volumes remain modest, activity is gradually expanding around the edges of the onshore market window.

“Fair treatment and pricing transparency for smaller, less sophisticated forex customers continues to be a concern. The pricing gap between large and small clients is far wider than what operational costs can justify,” he said.

The RBI has announced plans to enable forex retail access via Bharat Connect. In its pilot phase, individuals will be allowed to purchase US dollars, with further expansion based on early experience.

Malhotra also flagged the use of banking channels by unauthorised forex trading platforms, calling for greater vigilance and stronger customer awareness efforts. The RBI has been actively updating its alert list and conducting public campaigns to highlight the risks.

“Today, financial markets are at a critical juncture, balancing global and domestic challenges with unprecedented opportunities and growing expectations. It’s like solving a complex puzzle with many moving parts and stakeholders,” he said.

He emphasised that financial markets must support India's growth by ensuring efficient, cost-effective funding aligned with national aspirations.

Call money market liquidity, asymmetric rates flagged

Malhotra urged banks to ensure that the RBI’s liquidity measures are transmitted across all market segments, flagging concern over asymmetric rates between the call money market, market repo rate, and TREPS.

He stressed that the shrinking liquidity in the call money market needs attention, especially since the call rate is the operating target for monetary policy. The market is also key to the robustness of MIBOR, the benchmark for the interest rate derivatives market.

“This calls for more proactive participation by banks—the only entities with access to RBI’s liquidity, the call money market, and the repo market. They must ensure seamless transmission of the RBI’s liquidity stance,” he said.

He also reiterated that while India remains the fastest-growing economy globally, the 6.5 per cent real GDP growth projected for FY26 is still below the country's ambitions.

Need to widen participation in g-sec markets

The RBI Governor called for deeper secondary market liquidity in government securities to benefit smaller participants such as cooperative banks, pension funds, and provident funds. Referring to the RBI Retail Direct scheme launched in 2021, he said it’s crucial to ensure investors can transact at fair prices.

He pointed out that the turnover ratio in dated government securities remains modest—just over 1—indicating liquidity is concentrated in a few securities, especially shorter tenors.

Malhotra also noted that secondary market activity is dominated by banks and primary dealers, while most large institutional investors tend to hold securities to maturity. Among over 3,000 institutional investors in g-secs, the top 10 alone accounted for a third of the total trading volume in 2024. He added that foreign investor interest in the g-sec market has increased following India’s inclusion in global bond indices.