In his first year as RBI governor, Malhotra has presided over some of the most consequential and liberalising shifts in Indian banking regulation in nearly a decade. Bankers and market experts described him as “one of the most open governors” the financial sector has seen – a technocrat who is willing to listen, debate, re-think and, most importantly, trust institutions to govern themselves provided they strengthen their supervision.
Most described him as a highly accessible governor. “This governor is open to talk… people are able to have access to him and give their views,” said a senior banker, adding that this style has noticeably changed the mood among lenders.
Since Malhotra took charge, the RBI’s monetary policy committee (MPC) has cut rates when it was widely expected to do so, and when it wasn’t. At his first such meeting in February, the rate-setting panel delivered a 25-basis-points (bps) cut. Between February and December, MPC delivered a blockbuster 125-bps cut, signalling Malhotra’s willingness to act decisively to support growth. This has been one of the most aggressive easing cycles since 2019.
In fact, he delivered a surprise cash reserve ratio cut of 100 bps in the June policy and sustained system liquidity, which markets read as the RBI doing whatever the market asked for, and a bit more.
Longtime RBI watchers said, however, that the possibility of Malhotra tightening the leash when needed mustn’t be discounted. Former deputy governor R Gandhi said regulatory eras are like a pendulum. “At times you need tightening, at times you need liberalisation. True adaptability is in recognising when you’ve gone too far in either direction,” he said. So far, he said, Malhotra has eased policy where needed and acted pragmatically, but won’t hesitate to tighten again if markets or industries misbehave.
Yet, it hasn’t all been smooth sailing. Malhotra’s first year also saw the IndusInd Bank derivatives fiasco, which forced the RBI to step in, leading to the exits of its chief executive and chief financial officer. The development brought up concerns around board oversight, succession clarity, and market confidence.
A quiet makeover
An important structural change Malhotra has brought about is laying out a path for permanent and long-term capital for banks, experts said. “He has paved the way to say that if foreign capital is to come in as FDI (foreign direct investment) in banking, we’d be very happy,” Abizer Diwanji, founder of strategic advisory provider Neostrat Advisors.
This shift is significant since India currently does not allow corporate ownership of banks and domestic pools of long-term capital are limited. Under Malhotra, the RBI has signalled that it’s comfortable with allowing foreign strategic capital to assume larger roles, which would align India’s banking system with global norms.
Recent deals include the one between private sector lender RBL Bank and Dubai’s Emirates NBD Bank PJSC, weeks after Sumitomo Mitsui Banking Corp bought 24.2% of Yes Bank in two transactions.
Another important change Malhotra has brought about is increasing the regulator’s trust of bank boards and internal controls instead of relying solely on uniform, prescriptive regulations. He has repeatedly said that boards must take stronger ownership, banks must build internal control capacity, and that supervision, whether internal or external, must improve.
“Wherever regulation is relaxed, supervision has to step up. Regulation is not the only tool to govern. Supervision is the better option,” Diwanji said.
Major reforms
On easing existing regulations, announcements from October stand out. On 1 October, the RBI announced a series of more than 20 deregulations. Major moves included allowing banks to finance mergers and acquisitions, something the industry had sought for over a decade. It also raised the limit for banks to lend against shares, units of real estate investment trusts and infrastructure investment trusts, and removed the cap on loans against listed debt securities.
The central bank also proposed to revise the external commercial borrowing (ECB) norms, removed the limit on a bank’s credit exposure to large corporations, and announced it would give the industry enough time to transition to the expected credit loss framework starting in April 2026.
“I think he’s been one of the most open governors who has opened up the banking sector significantly. All his moves have been in that direction, be it rate cuts at the very first MPC or the current liberalization which says that banks can fund M&As,” Diwanji said.
Treasury officials also gave Malhotra’s performance a thumbs up. While inflation has been well below the RBI’s target of 4% (it was 0.25% in October) and growth exceeded expectations at 8.2% in the September quarter, what has tied the RBI’s hands this year is the Indian rupee’s 5% depreciation against the US dollar.
“Rate cuts were front-loaded because the economy needed it, while forex management remained steady,” said Neeraj Gambhir, treasury head at Axis Bank. “RBI’s operating approach towards the market changes – sometimes they are protective of a level and sometimes they allow more leeway in terms of the rupee’s volatility,” he said, adding that at the end of the day, capital inflows are weak and the current account deficit has steadily widened over time.
“By allowing the rupee to weaken, the RBI has just managed the pace of depreciation, and doing so does require market intervention,” he added.
What lies ahead?
As Malhotra begins his second year, the industry has a clear wish list. A common suggestion involves significant consolidation among banks and major non-banking financial companies (NBFCs), intending to create a route for these large, corporate-backed NBFCs to secure deposit licences. At present, the RBI does not seem in favour of granting deposit licences to NBFCs in general.
The industry also wants greater openness to FDI with capped voting rights, which would allow access to foreign capital without giving up full governance control.
Vivek Iyer, partner and national leader financial services – risk advisory at Grant Thornton Bharat LLP, said, “I do believe they should look at increased FDI limits, but voting rights and FDI limits should not be synced with each other. I say that is because while foreign direct investors need to take part in India’s growth story, granting them voting rights would give them the power to make decisions on how India’s banking business operates.”
The industry also expects a liquidity window for top-tier NBFCs to help prevent liquidity stress from snowballing into solvency risks.