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Informist, Friday, Feb. 7, 2025

 

By Shubham Rana and Pratiksha

 

NEW DELHI/MUMBAI – Sanjay Malhotra's first monetary policy statement as the Reserve Bank of India governor on Friday has only confirmed what many had hoped for when he took over in December – sweeping changes are afoot at Mint Street on monetary policy, foreign exchange management and financial sector regulations.

 

This was the first meeting of the Monetary Policy Committee without Shaktikanta Das and Michael Patra since 2018 after their tenures as governor and deputy governor, respectively, ended in December and January. Replacing the two, Malhotra and Deputy Governor Rajeshwar Rao led the MPC in lowering the repo rate for the first time since May 2020, bringing it down by 25 basis points to 6.25%.

 

"The RBI's decision to cut the repo rate by 25 bps today (Friday) to 6.25% confirms that, under new leadership, its priorities have tilted from containing inflation to providing more support for the economy," said Shilan Shah, deputy chief emerging markets economist at Capital Economics.

 

Malhotra said that the MPC felt a less restrictive policy is appropriate at this juncture, keeping in mind the growth-inflation dynamics. With inflation seen on a moderating path – the RBI has projected CPI inflation to moderate to 4.2% in 2025-26 (Apr-Mar) from 4.8% in FY25 – the central bank had space to support growth.

 

Growth took priority at this MPC meeting after the government's first advance estimate pegged the FY25 GDP growth at a four-year low of 6.4%. Malhotra said though growth is expected to pick up from the seven-quarter low of 5.4% in Jul-Sept, it will be much below that of last year.

 

The RBI has projected GDP growth in FY26 at 6.7%. The governor also said that the central bank will continue to improve its macroeconomic models to give as precise a forecast as possible – the RBI had originally projected GDP growth for FY25 at 7.0% compared with the National Statistics Office's advance estimate of 6.4%. 

 

As economic activity slowed down, calls for a rate cut increased and rose to a crescendo in January after the RBI announced INR 1.5 trillion worth of measures to ease the liquidity strain. While Malhotra did not announce specific liquidity measures on Friday, he said the RBI will proactively provide sufficient transient and durable liquidity support ahead.

 

Ever since he joined office, market players have noted that Malhotra seems to have consciously sidestepped from the FX policy of his predecessor, allowing more flexibility in the exchange rate. 

 

The central bank, during the last two years of Das' term, visibly tightened its grip on the Indian currency, leading to volatility dropping to historical lows. Case in point: Under Das, the rupee weakened by 1.9% against the US dollar in 2024. In the two months since Malhotra took over, the Indian currency is down over 3.2%.

 

Malhotra's policy statement ensured that market participants, who were looking for confirmation about the new governor's changed approach to foreign exchange management, got the same. "Given the references to the efficiency of the FX market and the press conference highlighting the role of global uncertainties, we infer that the RBI may be comfortable with the recent FX moves. This is also evident in the recent FX moves," economists at Standard Chartered Bank said.

 

While Malhotra, just like Das, said that the central bank's intervention in the currency market does not target a specific exchange rate level or band, he added that the RBI's intervention focuses on smoothening "excessive" and "disruptive" volatility in the exchange rate.

 

Malhotra also went out of his way to display confidence in the efficiency of the currency market and said that the rupee exchange rate will continue to be determined by market forces. This was a departure from his predecessor, who took pride in the stability of the rupee's exchange rate.

 

Adding to the list of changes, Malhotra also put contentious regulatory norms proposed before the beginning of his term on an extended hold. The governor stated that changes in liquidity coverage ratio norms, expected credit loss and project finance norms will not be implemented in FY26. He said that sufficient time will be given to banks and non-banking financial companies to implement any potential tweaks.

 

Policy watchers were also in for a visible shift in the presentation of the policy outcome statement, with the duration of the same being just under 30 minutes. In fact, unlike in the past, the new governor allocated more time to answering media questions and kept his statement short and crisp. The new governor also did away with the tradition of reiterating the policy statement at the post-policy press conference.

 

"New Governor Sanjay Malhotra communicated in more direct (or more appropriate, less verbose) language than his predecessor Shaktikanta Das. The lack of quotes from Mahatma Gandhi in the statement was a notable difference," Shah of Capital Economics said. 

 

At the press conference, the governor opted for a to-the-point approach while answering questions. For instance, when asked about the current real rate, the governor outrightly said it is at 1.5% or so at present.

 

Malhotra's arrival seems to have patched up the cracks in RBI-government relations that started appearing towards the end of Das' term. "The first monetary policy under the leadership of governor Malhotra has been successful in delivering an optimum dose of medicine for the economy, following on the heels of a growth-supporting non-inflationary Budget which would help to preserve and strengthen the macro-financial stability of the economy, while delivering a boost to growth in the quarters ahead," said Kaushik Das, chief economist - India at Deutsche Bank.

 

The outcome of the first MPC meeting of the Malhotra era had many differences from Das' tenure but one striking similarity--the lack of guidance on interest rates. Malhotra maintained that the MPC will take interest rate decisions in future meetings based on a "fresh assessment of the macroeconomic outlook". Nevertheless, economists expect the MPC to deliver more rate cuts going ahead with wide expectations of a 25 bps reduction in April.  End

 

Edited by Saji George Titus

 

 

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