As policy-trade-offs are becoming acute, brokerages expect the new RBI Governor to take a practical approach.
Revenue secretary Sanjay Malhotra, who was on December 9 named the new Reserve Bank of India (RBI) governor, will have to walk a fine line between inflation and growth as the economy moves into a period of heightened volatility and global turmoil, brokerages have said.
To a number of experts, the appointment of Sanjay Malhotra as the next Governor came as a surprise; most analysts had penciled in a one-year extension to current Governor Shaktikanta Das’ tenure.
Malhotra, who begins his three-year term on December 11, is the second consecutive career civil servant to helm the central bank. Das served as the economic affairs secretary, revenue secretary and the fertiliser secretary before taking over as the RBI governor.
Bank of America said Sanjay Malhotra will be taking charge of the RBI at a tricky period. “Malhotra faces the immediate challenge of dealing with sharper-than-expected slowdown in growth coupled with the near-term volatility in inflation while also ensuring a stable currency,” noted the brokerage.
Domestic brokerage Emkay Global noted that the new Governor and MPC will also have substantially different policy challenges as well as macro and global landscape while stepping into CY25 compared to what the Das-led regime faced at beginning-CY24.
“The policy trade-offs are getting acute: the entrenched state of India’s stagflation, tricky timings and small window of conventional rate cuts as global dynamics turn more fluid, and mounting FX pressures and increasing cost of FX intervention - none of these were challenging in the same period last year,” said the brokerage.
However, regardless of the macro picture, the transition is expected to be completed smoothly. Brokerages expect coordination between fiscal-monetary policy to continue in the new regime as well. “We see [Sanjay Malhotra] continue the practical approach that has served the RBI MPC rather well in turbulent times instead of doing anything radical,” noted Barclays Research.
What is the outlook on rate cuts?
In October, three new new external members were appointed to the Monetary Policy Committee (MPC). Further, the Deputy Governor Michael Patra’s term will expire in January 2025. If he is replaced, the RBI will have five of six new members ahead of the February MPC meeting. International brokerage UBS did flag concern, noting that five of six new members could add volatility to the market amid rising global uncertainty.
Japan-based broking house Nomura posited that the Reserve Bank of India could see a move to a more accommodative monetary policy. According to Barclays Research, the MPC could commence its rate easing cycle from February 2025, following a hold at the recently concluded December meeting.
Goldman Sachs added that the expectation is of a shallow easing cycle of 50 basis points, while UBS believes the easing will come to the tune of 75 basis points for the cycle. However, during the interest rate cuts, the RBI will aid transmission by keeping enough banking system liquidity.
On the prospects of a cut in interest rate between meetings, BofA said, “With a new governor being selected, the risks of an intermeeting rate cut even if inflation comes off sharply have declined materially.”