Malhotra’s RBI Needs Moral Suasion to Repair Policy Transmission?

Under Governor Sanjay Malhotra, the Reserve Bank of India has acted across rates, liquidity management, regulation, and balance-sheet measures in the last fifteen months. There has been no dearth of effort on actions but market responses to these actions have often been cautious, with signals being interpreted narrowly, discounted relatively quickly or worse triggering the exact opposite reaction. 

The issue confronting the RBI today does not appear to be an absence of action. Rather, it is that decisions are not landing with markets in a way that reliably shapes behaviour.

The question is what intent and actions are getting lost in translation or transmission.

Policy transmission remains uneven and the bond markets continue to trade with a degree of scepticism, banks appear selective in responding to signals, and currency markets show limited conviction that guidance will anchor expectations for long. This repeated divergence between policy intent and market response points to a transmission gap rather than a shortfall in the policy toolkit itself.

Central banking does not operate solely through formal instruments or published statements. It also relies on an institutional layer that is less visible but has historically played an important role: moral suasion.

At its simplest, this involves sustained, largely private engagement with financial institutions to clarify intent, explain reaction functions and reduce ambiguity. In periods of uncertainty, this layer can influence whether policy signals are absorbed or remain contested.

There are indications that this channel may be less active or less effective at present.

No matter how many meetings are held as a group, the real insights emerge in the less visible back-channel meetings held at all levels by institutions with RBI personnel.

The broader macro-financial environment makes this particularly relevant. Credit growth remains uneven, global financial conditions are uncertain, and large government borrowing programmes dominate market positioning. External developments, including trade tensions emanating from the US, further complicate domestic signalling. In such conditions, markets tend to respond cautiously, placing greater weight on how policy intent will be carried through rather than on individual measures.

Public communication plays an important role, but it may not be sufficient on its own. Policy statements and formal guidance can outline intent, but they cannot always address how that intent is interpreted across different balance sheets and risk profiles. When measures fail to transmit fully, the constraint is often not operational. It lies in how decisions are read, internalised and acted upon by institutions.

Past RBI leadership appeared to recognise this dynamic. This meant that they leveraged institutional hierarchy, as appropriate, to work as its eyes and ears, and occasionally mouth, when the situation demanded it.

Moral suasion was not always used as pressure or persuasion, but as a way of reinforcing signals and narrowing interpretation gaps. Regular, discreet engagement with bank leadership and market participants helped ensure that policy intent was understood beyond official communication. It also provided feedback on how conditions were evolving within institutions.

Some years ago, the monetary policies (they were called monetary and credit polices were announced to heads of banks to ensure clear messaging). Banking, central banking, and the markets have evolved and there is no need to turn the clock back.

Under Malhotra, the RBI’s public-facing communication has been orderly and extensive. Private engagement, however, appears more episodic. The result is that policy actions, while clear on paper, do not always translate into the desired behavioural response.

As the RBI approaches its next policy review, the scope for major recalibration through formal instruments appears limited and not central to the issue. The more immediate challenge lies in how policy decisions are being interpreted and acted upon.

Strengthening quieter, informal channels of interaction, including moral suasion, may help align policy intent with market behaviour and improve the likelihood that decisions land as intended.