Sanjay Malhotra Highlights Risks Amid Resilience at FIMMDA-PDAI Annual Conference in Bali
India’s economy, though resilient, remains vulnerable to global shocks, according to Reserve Bank of India (RBI) Governor Sanjay Malhotra. Speaking at the 24th FIMMDA-PDAI Annual Conference in Bali, the Governor underlined that while macroeconomic stability has improved, the country’s GDP growth still lags behind aspirational targets. He stressed the need to deepen domestic financial markets and tackle longstanding inefficiencies in liquidity, pricing, and participation across asset classes including government securities (G-Secs), foreign exchange, and term money markets.
Malhotra reaffirmed that domestic inflation is projected to stay aligned with the 4% target for FY26 and lauded the improvement in the growth-inflation balance following policy interventions. However, he cautioned that global uncertainties and weather-related disruptions continue to pose inflationary risks.
Highlights:
RBI sees real GDP growth at 6.5% for FY26, still below long-term targets
Inflation expected to remain close to 4%, but global and climatic risks remain
RBI remains agile, pledging responsive and proactive monetary policy actions
G-Sec Market Liquidity: Structural Inefficiencies and Reforms
Despite being globally recognized for liquidity, India’s Government Securities (G-Sec) market is hindered by low turnover ratios and uneven liquidity distribution. Governor Malhotra noted that the annual turnover of dated G-Secs remains just above one (1), and including state government securities pushes this figure below one. Liquidity is concentrated in a narrow set of maturities, while institutional investors such as pension funds and cooperative banks often follow a buy-and-hold strategy, contributing minimally to secondary market activity.
The top ten institutional investors accounted for nearly one-third of total G-Sec trading turnover in 2024, pointing to high concentration. While the RBI has attempted to democratize market access via initiatives like the Retail Direct platform and its mobile app, broader market participation remains limited. Malhotra urged banks and primary dealers to ensure better price discovery and deal execution for smaller participants, including cooperatives and pension funds.
Highlights:
G-Sec turnover ratio remains low despite perceived liquidity
Top 10 investors account for one-third of turnover
Secondary market activity concentrated in short-term maturities
RBI promotes retail access via Retail Direct and NDS-OM for brokers
Banks and PDs urged to enhance liquidity for small investors
Forex Market: Need for Greater Price Transparency and Retail Inclusion
Governor Malhotra voiced concern over the significant pricing disparities between small and large forex customers. He criticized the tepid adoption of the FX-Retail platform, attributing it largely to banks’ reluctance to offer the platform to their clients. Despite existing regulations mandating disclosure of interbank mid-market rates, market-makers have fallen short in providing transparent pricing to retail clients.
To address this, the RBI recently announced that access to FX-Retail would be enabled through the Bharat Connect platform. A pilot initiative will soon allow individuals to purchase US dollars transparently, with plans for expansion depending on its success. Malhotra called on Authorised Dealers and market participants to fully support the pilot and improve awareness about the risks of engaging with unauthorized forex trading platforms.
Highlights:
Major price divergence between large and small forex customers
FX-Retail platform underutilized due to lack of bank cooperation
RBI pushing retail access via Bharat Connect platform
New pilot to enable individual dollar purchases
Banks urged to counter unauthorized forex trading platform use
Term Money Markets: Persistent Gaps Despite Reforms
Despite multiple policy interventions over the years, India’s term money markets remain underdeveloped, particularly in the 3-day to 3-month segment. Governor Malhotra observed that the overnight segment dominates, leaving a structural void in the formation of a robust term yield curve. This impacts the pricing of a wide array of interest rate products, including bank loans and derivatives.
While substitutes such as Overnight Indexed Swaps (OIS) and Treasury bill yields are used, a reliable term structure benchmark remains absent. Malhotra also pointed out the decline in liquidity within the call money market—used as the operational target of the RBI’s monetary policy. Furthermore, occasional asymmetries between rates across different money market instruments, including call, market repo, and TREPS, complicate monetary transmission.
The Governor underscored the importance of proactive engagement from banks, which have privileged access to the RBI’s liquidity windows and core market segments, to ensure smooth and timely implementation of policy decisions.
Highlights:
Term money market (3-day to 3-month) remains undeveloped
Absence of risk-free term structure hampers pricing of credit products
Liquidity in call money market declining, impacting MIBOR benchmark
Discrepancies observed across different money market rates
RBI calls for more proactive transmission from banks
