Sanjay Malhotra Named New RBI Governor Amid Economic Challenges

Sanjay Malhotra, the Revenue Secretary named as the new Governor of the Reserve Bank of India (RBI) on December 9, faces a critical challenge of balancing inflation and growth during a period of heightened economic uncertainty, according to brokerage analyses. His three-year term begins on December 11.

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Malhotra’s appointment surprised many experts, as analysts widely expected a one-year extension for the current Governor, Shaktikanta Das. Notably, Malhotra becomes the second successive career civil servant to lead the central bank, following Das, who previously served as Secretary in various ministries, including Economic Affairs and Revenue.

Challenges Ahead

Bank of America highlighted the complexities Malhotra inherits, citing a sharper-than-anticipated growth slowdown, near-term inflation volatility, and the need to maintain currency stability. Emkay Global added that the new Governor will encounter distinct policy and macroeconomic challenges compared to those faced under Das at the start of 2024.

"The policy trade-offs are becoming increasingly intricate," Emkay noted, referring to stagflation risks, limited opportunities for conventional rate cuts amid fluid global dynamics, and pressures on foreign exchange reserves.

Despite these challenges, analysts expect a seamless leadership transition, with fiscal and monetary policy coordination likely to continue. Barclays Research projected that Malhotra would maintain the pragmatic approach that has characterized the RBI's Monetary Policy Committee (MPC) in turbulent times.

Rate Cuts and Monetary Policy Outlook

The potential for rate cuts is a key focus under Malhotra’s tenure. October saw the appointment of three new external MPC members, with Deputy Governor Michael Patra’s term set to end in January 2025. This could result in five of six MPC members being new by February, raising concerns about potential market volatility, as flagged by UBS.

Nomura suggested a shift towards a more accommodative monetary policy could be on the horizon. Barclays Research indicated that rate cuts might commence in February 2025 after a hold at December’s meeting. Projections for the easing cycle vary, with Goldman Sachs expecting a shallow 50 basis points reduction, while UBS anticipates cuts totaling 75 basis points.

BofA, however, downplayed the likelihood of intermeeting rate cuts, emphasizing that inflation would need to fall sharply to prompt such measures under the new leadership.

Currency Market Reaction

The Indian rupee hit a record low of 84.80 against the US dollar on Tuesday, reflecting market reactions to Malhotra’s appointment and expectations of future rate cuts. The USD/INR pair reached an all-time high of 84.86 in non-deliverable forward markets earlier, while the rupee closed at 84.73 on Monday. Analysts attributed this to the RBI’s intervention through dollar sales by state-run banks.

Amit Pabari, MD of CR Forex Advisors, noted that the rupee is expected to trade within the 84.50–85.00 range, with a slight downward bias. He added that global uncertainties remain a key concern, and upcoming US inflation data would likely influence market trends.

Nomura reiterated that the accommodative monetary stance anticipated under Malhotra strengthens the likelihood of a rate cut during the February MPC meeting.