RBI governor open to using rates to curb financial risks

Reserve Bank of India (RBI) Governor Sanjay Malhotra has said the central bank does not rule out using monetary policy in exceptional circumstances to address financial stability risks, even though it generally relies on other tools for that job. The RBI governor made the remarks at a media summit on Friday, adding that any decision to use interest rates for financial stability purposes would be considered by the Monetary Policy Committee (MPC).

The RBI governor said the central bank generally relies on macroprudential measures rather than interest rates to manage financial stability risks. He said the appropriateness and effectiveness of using monetary policy for such a purpose would depend on prevailing conditions. His remarks draw a line between the RBI's normal approach and an option it keeps open for unusual situations.

The comments come at a time when the RBI has been active on several fronts. The central bank raised the repo rate to 5.50% earlier this month in its first rate hike in nearly four years, and it has taken steps in the foreign exchange market to curb excessive volatility in the rupee. The RBI governor's remarks underline the distinction between regulatory requirements governing financial institutions and the central bank's broader approach to maintaining financial stability.

The RBI governor on listing rules and Tata Sons

Malhotra also spoke about the rules for upper-layer non-banking financial companies (NBFCs) and core investment companies (CICs). He said CICs accessing public funds, directly or indirectly, must register with the central bank, while upper-layer NBFCs are required to list on stock exchanges. His comments come amid uncertainty over the listing obligations of Tata Sons, the holding company of the Tata group.

The RBI governor declined to comment on any specific regulated entity, but explained that registration requirements address systemic risks arising from group-level financing arrangements. He clarified that CICs without direct or indirect access to public funds could be exempted from registration. Companies classified as upper-layer NBFCs, however, must comply with mandatory listing requirements.

The RBI designated Tata Sons an upper-layer NBFC in 2022, giving it until 2025 to list. Instead, Tata Sons repaid outstanding debt and applied to surrender its CIC registration. According to reports, the central bank rejected that request last month and directed the company to comply with upper-layer NBFC regulations.

Meanwhile, Tata Trusts, which controls Tata Sons, has proposed merging Tata Electronics Systems Solutions (TESS) and Tata Consulting Engineers (TCE) into the holding company. The proposal seeks to change Tata Sons' business composition so that it would no longer qualify as an NBFC or CIC. The restructuring requires approval from the Tata Sons board and a no-objection from the RBI.

What the RBI governor's remarks signal

The RBI governor's openness to using interest rates for financial stability in exceptional cases is notable because the central bank has usually kept the two jobs apart: monetary policy for price stability, and regulatory, supervisory and macroprudential tools for financial stability risks. Malhotra's remarks suggest that separation is not absolute, and that the MPC could weigh in if conditions demanded it.

For markets, the message is twofold. On one hand, the RBI's normal toolkit for financial stability remains regulation and supervision, as the Tata Sons listing debate shows. On the other, the RBI governor has kept the rate option on the table for circumstances where other measures may not be enough. The MPC will take any such decision, and Malhotra said its judgment would turn on the conditions prevailing at the time.