New RBI governor should uphold autonomy amid global flux
After six long years, the Reserve Bank will see a change of guard with Sanjay Malhotra taking over the reins as governor on Wednesday. The ink is barely dry, but Malhotra’s appointment has fuelled market expectations of a rate cut as early as February 2025—for two reasons. One, growth is on a weak footing and may need a nudge from the RBI in the form of lower interest rates. Private polls suggest that headline inflation is easing and likely softened in November after October’s 14-month high of 6.21 per cent. Two, voices within the government that expressed disappointment over a tight monetary policy believe that the RBI under Malhotra may relieve some of the rate cut angst. The chorus for cuts comes at a time the debate over food-vs-core inflation as RBI’s mandate remains unsettled and as the government is working on changing the weightage of food items on the inflation index. Lastly, the RBI’s 2-6 percent inflation target itself is under question, with some favouring a slightly higher target band.
At the same time, half the monetary policy committee (MPC) was reconstituted this October with the appointment of three new members—all of which may point to a change in policy direction. Last week, two of the six MPC members voted in favour of a rate cut; among the four who voted for a pause were the outgoing governor Shaktikanta Das and his deputy Michael Patra. However some believe that the easing cycle has already begun under Das, with the MPC cutting the cash reserve ratio by 50 basis points, which may lower market interest rates. Another compelling reason rates may be chopped is the widening gap between India’s repo rate and the US’s federal funds target rate, which currently stands at 175 basis points.
Besides interest rates, Malhotra will also have to deal with a range of issues including the fluctuating dollar exchange rate and financial market volatility amid concerns about Trump 2.0 tariffs. The incoming governor has one less headache than Das, thanks to the central bank’s ongoing cordial relationship with the sovereign. While Malhotra too may follow Das’s balanced approach to policy-making, given the changing world order and geopolitical uncertainties, it’s essential to remain vigilant and uphold the central bank’s credibility and autonomy.