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Informist, Thursday, Feb. 6, 2025

 

By Siddharth Upasani

 

NEW DELHI – The entry of Sanjay Malhotra as the governor of the Reserve Bank of India in December seems to have completely changed the central bank's thinking on some key issues such as exchange rate management and liquidity support to the banking system. But will the former revenue secretary on Friday announce the interest rate cut that has seemingly been signalled over the last month-and-a-half?

 

In his statement to the media on his first day as the governor on Dec. 11, Malhotra highlighted the importance of policy continuity, only for the central bank to relax its grip on the rupee rather substantially in subsequent weeks. Under Shaktikanta Das, the rupee weakened by 1.9% against the US dollar in 2024. In the 57 days since Malhotra took over, the Indian currency is down 3.0%. In recent weeks, the RBI has also rapidly taken on board suggestions from market players on how the widening liquidity deficit can be bridged, with actions taken ranging from open market purchases of government bonds to daily fine-tuning operations and a dollar-rupee buy-sell swap auction. Friday will also see the RBI conduct a long-term repo.

 

In his meetings with bankers and economists, Malhotra has mostly listened without giving away much on what he actually thinks about inflation and interest rates. And while expectations may be more driven by the fact that Malhotra is not Das--the long-time governor was increasingly viewed as a hawk by the end of his six-year term--a first repo rate cut in almost five years is widely expected on Friday thanks to headline retail inflation having fallen by nearly a full percentage point to 5.22% in December and GDP growth sliding to 5.4% in Jul-Sept and a four-year low of 6.4% in 2024-25 (Apr-Mar), as per the first advance estimate.

 

"Our base case view is that MPC is likely to cut rates in February by 25 bps given weaker growth and softening inflation. It is likely to be followed by another rate cut in April taking the cumulative rate cuts to 50 bps implying real rate of 1.5%," ICICI Bank economists said in a note Wednesday.

 

The MPC has left the repo rate unchanged at 6.50% for two years. According to an Informist poll, 12 of 14 economists see the policy rate being cut by 25 bps on Friday, with forecasts suggesting inflation will ease to 4.0% in the third quarter of FY26 while growth is seen in the range of 6.3-6.8% in the next financial year, as per the Economic Survey presented on Friday.

 

A UNANIMOUS CUT?

Malhotra is not the only monetary policy debutant at this week's meeting. Deputy Governor M. Rajeshwar Rao, given temporary charge of the Monetary Policy Department following Michael Patra's retirement, will also vote on the repo rate. And if history is anything to go by, Rao will likely vote in line with Malhotra.

 

There have been two separate occasions on which a deputy governor has been given temporary charge of monetary policy, making him a member of the MPC. And in each of the five meetings, the deputy governor--R. Gandhi in Oct-Dec 2016 and B.P. Kanungo in Aug-Dec 2019--has voted in the same manner as the governor, including the unusual 35 bps repo rate cut of August 2019.

 

In terms of the external members, Ram Singh and Nagesh Kumar had voted for a reduction in the repo rate in December and there is little reason to think that might change this week.

 

That leaves RBI Executive Director Rajiv Ranjan and external member Saugata Bhattacharya, both of whom voted to leave the repo rate unchanged last time around. But while Ranjan had then highlighted the importance of the RBI correctly sequencing and timing its actions for them to be effective, Bhattacharya had warned the risk of making a policy error had increased in December compared to October.

 

It is worth noting that it has been more than five years since all three representatives of the RBI on the MPC did not vote in sync with each other and that prior to his appointment, Bhattacharya was widely seen as being dovish. As such, the possibility of a unanimous rate cut decision Friday exists. But markets will care little about the score-line not being 6-0 as long as Malhotra delivers a rate cut.  End

 

Edited by Ashish Shirke

 

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