To cut or not to cut! Will RBI’s new Governor Sanjay Malhotra cut rates or focus on inflation?

RBI’s new Governor Sanjay Malhotra cut rates: Sanjay Malhotra is the new Reserve Bank of India (RBI) Governor effective December 11 for a three-year term, who has arrived at a crucial time when the central bank is battling both inflation and growth front. He succeeds Shaktikanta Das, whose term ends on December 10. Along with the new Governor, there will also be an all-new Monetary Policy Committee at the helm. Will the newness bring uncertainty and what could be the big changes that we could expect? Will it be an era of aggressive rate cuts or will inflation issues continue to reign in the economic backdrop?

International and big brokerage houses have come up with their expectations from the newly appointed Governor. Bank of America and UBS see the possibility of strengthening the Government’s role in monetary policy decisions but both along with Barclays believe that a cut in rates is still a possibility in February. Nomura expects three potential changes-

-First, a likely shift towards more accommodative monetary policy

-Second, a less pro-cyclical macroprudential policies amid slowing bank credit growth

-Third, a bit more flexibility in currency fluctuations, going forward, as compared to the relatively tighter leash seen over the last one year and more.

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Will Sanjay Malhotra cut rates in February?

On the rate cut call, Sonal Varma, MD and Chief Economist for India and Asia excluding Japan, Nomura, said, “With the new RBI governor from the MOF and with fresh thinking at hand, a rate cut at the February MPC meeting is now likely cemented (and also warranted, in our view). There is some possibility of a bigger 50 bps catch-up move upfront, though this will likely be data-driven. For now, we pencil in a 25bp cut in February and expect 100bp in total cuts to a terminal rate of 5.5 per cent by end-2025. With growth risks skewed to the downside, we also see the risk of a lower terminal rate.”

Despite the change of guard, Barclays too retained its February 2025 rate cut call. Shreya Sodhani, Regional Economist, Barclays, said that with this appointment following the appointment of three new external members in October, and the likely replacement of Deputy Governor Michael Patra (whose term expires in January 2025), the MPC will sport an almost new look by the February meet. “We still expect the MPC to commence its rate easing cycle from February 2025, following a hold at the recently concluded December meeting. In Q3 FY2024-25 (Oct-Dec), high-frequency indicators of economic activity are showing some signs of a rebound in momentum. For November, we expect CPI inflation to moderate to 5.4 per cent YoY, from 6.2 per cent in October. We expect the MPC to derive comfort from this and cut the policy repo rate by 25bp on 7 February. We see a cumulative 100bp of cuts in the easing cycle, taking the policy repo rate to 5.5 per cent by March 2026. Post-February 2025, we expect three more cuts of 25bp each in April, August and February 2026,” added Shreya Sodhani.

With the recent surge in food prices expected to be softened in the upcoming months and headline CPI inflation to get further relief from lower energy prices and input costs, UBS Securities also maintained its view that RBI will lower the repo rate by 75bps starting in Feb 2025. Tanvee Gupta Jain, Chief India Economist, UBS Securities, said, “Our estimates suggest headline CPI inflation has likely peaked and could soften toward 4.5 per cent YoY by the June 2025 quarter. We think the balance of risks is becoming increasingly tilted toward weaker growth, especially as the risk of a potential US tariff hike on China becomes more tangible. Additionally, the real policy rate is in the top quartile of the 10-year distribution. Irrespective of the RBI Governor, we maintain our view that a high real policy rate and softening growth could create room for the RBI to lower the repo rate by 75bps starting in Feb 2025, despite weaker FX and received 5y swaps targeting a move toward 5.80.”

What do we know about Sanjay Malhotra’s economic views?

Sanjay Malhotra has been the revenue secretary in the Ministry of Finance (MoF) since December 2022. He has previously served as secretary of the Department of Financial Services. He has also been a director on the RBI’s central board since February 2022. A seasoned bureaucrat, Sanjay Malhotra has worked on India’s taxation policy and power programme. “Sanjay Malhotra will be taking charge of the RBI at a tricky period. He faces the immediate challenge of dealing with a sharper-than-expected slowdown in growth coupled with the near-term volatility in inflation while also ensuring a stable currency. He has not had any strong statements except on tax policy in recent months, making his policy bias unclear as things stand. With a new governor being selected, the risks of an inter-meeting rate cut even if inflation comes off sharply have declined materially,” said an analysis report by BofA Securities.

Nomura also stated that ‘not a whole lot is known about Mr Malhotra’s views on current economic issues’. However, the brokerage firm added, “His experience has given him an acute appreciation of the government’s revenue generation and the importance of growth. For instance, in his existing role, Mr Malhotra recently warned tax officials against issuing exorbitant demand notices at the risk of compromising growth, stating that “do not kill the golden goose”.”

With the new Governor coming from the Ministry of Finance, UBS Securities said, market participants could be inclined to think that might lead to a stronger role for the government in monetary policy decisions. “Past experience showed that Mr. Das (a seasoned bureaucrat in previous roles), while maintaining the RBI’s autonomy, helped stabilise the relationship with the government, ensured financial stability (especially during the pandemic shock), and focused on financial inclusion and digital innovation,” said Tanvee Gupta Jain.

While Sanjay Malhotra has not publicly commented on monetary policy, Barclays stated, his views on taxation suggest focus on efficiency, simplification of the tax regime, and digitisation. “His work so far has focused on improving transparency, encouraging fair practices and simplifying processes. We see him continue the practical approach that has served the RBI MPC rather well in turbulent times instead of doing anything radical. We also acknowledge his pro-growth outlook,” said Shreya Sodhani.