Real interest rates remain high even as nominal rates fall
**EDS: THIRD PARTY IMAGE** In this screengrab from a video posted on Dec. 5, 2025, Reserve Bank of India (RBI) Governor Sanjay Malhotra speaks as he announces the fifth bi-monthly monetary policy for the current fiscal, in Mumbai. (@reservebankofindia593/X via PTI Photo) (PTI12_05_2025_000036B) | Photo Credit: –
Having cumulatively reduced the benchmark policy repo rate by 125 basis points (bps) since he took charge, Reserve Bank of India (RBI) Governor Sanjay Malhotra will now focus that transmission of repo rate occurs in broader markets. In a post monetary-policy committee (MPC) press conference, Malhotra talks about the RBI’s approach towards a depreciating rupee, aspired inflation target and the regulator’s conscious effort to repatriate gold stored in foreign countries to India. Edited excerpts:
Does the lower inflation forecast leave further space to support growth?
Whether there is more space (to cut repo rate) going forward, we are neutral today. We believe the important thing is that inflation has been benign. It has been around 3-3.5 per cent in the last two years, if you exclude the food component which has been volatile. And going forward too, if you exclude gold and silver, our expectation is that it will remain benign. Now whether that opens up policy for further rate cuts — that will be speculation. The more important thing now is having reduced repo rate by further by 25 basis points (bps), we have to concentrate on transmission. Considering that inflation is expected to be benign, I think let it first transmit into the real economy and then we will see how growth and inflation dynamics behave and we will take decisions policy by policy.
Is the rupee undervalued. What is the RBI’s approach to a depreciating currency?
Our stated policy has always been that we don’t target any price levels or bands. We allow markets to determine prices. Markets, in the long run, are efficient. We saw this earlier in February when the Rupee climbed up to almost ₹88 per US dollar, and within three months it came back below ₹84. So these fluctuations and volatility can happen. Our effort has been to reduce abnormal or excessive volatility, and we will continue to endeavour. Our external position is very strong. Going forward, we believe we have sufficient reserves, the current account deficit is very manageable, and given strong fundamentals, we will get good capital flows. So we are in a very comfortable position as far as the external sector is concerned.
Is consumer demand not picking up, which is leading to such a low level of inflation?
0.2 per cent is not the right level of inflation. We target 4 per cent. At the same time, I don’t think we should be looking at 0.2 per cent because there are going to be fluctuations, volatility in markets — whether it is forex, equity or prices in general. Some of the impacts are also because of base effects. Earlier, we had very high food inflation and now because of the base effect it seems to be low. But underlying inflation is certainly on the lower side, which is why we chose to cut the repo rate.
Will banks lower deposit rate post repo cut?
We have to look at real interest rates, when inflation is so low and going forward too, it is going to be low. Even though the nominal interest rate may seem low today, real rates are quite high. That is true not only for borrowers but also savers. So we do expect post today’s repo cut, deposit rates will moderate to a certain extent.
Is the RBI consciously repatriating physical gold stored in foreign countries to India?
We are diversifying. It is not good to store all gold at one place.
Interest rates on fresh rupee loan have increased. Bond yield also have not fell by the same degree as repo. Is transmission a challenge?
Interest rates have risen on the lending side in the last two months. As mentioned, the interest rate effect is now 79 bps.But if the proportion of higher-interest loans like unsecured loans and gold loans rises, then the average interest rate goes up. It does not mean that transmission has slowed. The number you should be looking at is the interest rate effect — whether interest rates have come down or not for different segments of loans. If the share of higher-yielding loans rises, the average interest rate rises, even though interest rates on each segment have come down.
On bond yields, the primary target we have is our operating target, and then it transmits to various other interest rates, including bond yields. If you compare bond yields now versus earlier and the spreads, they are more or less similar. Spreads are not higher. Please keep in mind, when the policy rate is lower, the spread will be higher. You cannot expect the same spread at a 6.50 per cent repo rate and a 5.50–5.25 per cent repo rate. Historically, if you look at spreads when the repo rate was at 5–5.15 per cent, the spreads today are not very different; they may, on average, have been a little lower than they were earlier. Bond yields follow the long-term policy rate path. That is one factor, but primarily it is all about demand and supply. Earlier, we had created excess supply through OMOs, which pushed yields down.
Published on December 5, 2025
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