MUMBAI: With the finance ministry insider Sanjay Malhotra helming the Reserve Bank from Wednesday, analysts are expecting the easing cycle to begin faster, especially given the macro-challenges that are sure to hit the country after Donald Trump takes charge of the White House next month, demanding the new incumbent to tread a fine balancing act.
In a surprise move on Monday, the government appointed revenue secretary Sanjay Malhotra as the 26th RBI governor effective Wednesday. The six-year term of Shaktikanta Das ended Tuesday.
Japanese brokerage Nomura said “with another finance ministry insider taking the helm at the RBI, the path is cleared for more and urgent easing and a likely shift towards more accommodative monetary policy.
”Tanvee Gupta-Jain, the chief economist at UBS Securities India, feels that surprise appointment of Malhotra will add to volatility to the markets amid rising global uncertainty if Trump goes ahead with his punitive tariff proposals.“
The change in the RBI governor will likely be followed by an appointment of new deputy governor as Michael Patra’s term ends on January 15, 2025.
With five of the six monetary policy committee (MPC) members relatively new (three external members joined in October), this could add volatility to the markets amid rising global uncertainty (related to Trump administration tariff proposals),” she said, adding the new governor will need to play a fine balancing act in restoring the inflation vs growth debate.
“We think the new governor will need to balance growth risk (considering real GDP growth slowed to 5.4 percent in Q2 and headline inflation rose to 6.2 percent in October). With the new governor coming from the finance ministry, the market could be inclined to think that a stronger role for government in monetary policy decisions,” she said.
For the forex market, the elephant in the room, she said could be the de facto forex policy of the central bank, which has helped keep the rupee’s volatility depressed all these years. With the inflation-growth mix still roughly balanced, the bar remains high for a big shift in this trend.
We see the dollar-rupee pair likely continuing on its grind higher, amid the country’s weak basic balance, soft equities outlook and hence outflows momentum and expensive valuation.
All this will have shallow easing of 75 bps starting in early 2025, Gupta Jain said, adding “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."
“Irrespective of the 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 75 bps starting in February,” she said.
Bank of America Securities in a note said the new governor is taking charge of the RBI at a tricky period. His immediate challenges are of dealing with sharper than expected slowdown in growth coupled with the near-term volatility in inflation while also ensuring a stable currency.
“With a new governor being selected, the risks of an intermeeting rate cut even if inflation comes off sharply have declined materially,” the Wall Street brokerage added.