Sanjay Malhotra took over at the Mint Street headquarters of the Reserve Bank of India (RBI) at a time when the country’s financial system and the economy in general are charting a broadly stable phase with interest rate cuts on the horizon. This is unlike his predecessors who often faced upheavals when they assumed the office of governor.
D Subbarao, who took over as RBI Governor on September 5, 2008, had a baptism of fire after the country’s economy was hit by the global financial crisis that began with the collapse of Lehman Brothers. After the Indian financial system was hit by the global crisis, Subbarao reduced the repo rate from 8.5-9 percent to 3.5 percent in a period of 6 months. He also cut the CRR and SLR – the amount banks have to keep with the RBI – to historically low levels to deal with the crisis.
On September 5, 2013, hours after taking office as the new Governor of the Reserve Bank of India, Raghuram Rajan was forced to announce a bold blueprint for the financial sector at a time when the economy was facing a high-profile multi-dimensional crisis. Consumer price inflation, industrial slowdown, free fall of rupee and widening current account deficit (CAD). These measures were intended to stabilize the Indian economy after the taper tantrum, or quantitative easing in the US, shook global markets again.
Rajan announced plans to internationalize the rupee, an inflation peg linked to the consumer price index, steps to boost exports and increase inflows, a review of the monetary policy process and plans to give banks freedom to open branches. Contact RBI for license.
After Urjit Patel became governor in 2016, the government announced demonetisation of Rs 1000 and Rs 500 notes and Patel, who had not opposed the plan, found it difficult to handle the banking system at the demonetization stage. Soon after that, he got into a big fight with the finance ministry over giving more surplus dividend to the government which eventually led to his exit.
Shaktikanta Das, armed with the knowledge of his experience in the finance ministry, started on a calmer note in December 2018 but the Covid pandemic in early 2020 forced him to change the dynamics of central banking. During the pandemic, Das cut the repo rate by 125 basis points to revive the economy and proposed a loan moratorium to mitigate the adverse effects of the pandemic.
Last mile deflation challenges and questions on economic projections
for the Malhotra, There may be some challenges, but not as difficult as those faced by his predecessors. GDP growth slowed to 5.4 percent in the second quarter ended September, while the RBI projected third quarter growth of 6.8 percent and fourth quarter of 7.2 percent. And if CPI inflation for 2024-25, which is projected at 4.8 per cent, remains at that level, Malhotra will be ready to cut the repo rate in the February monetary policy review. Will it be 25 bps or 50 bps is the real question.
However, former Governor Das indicated last week that the slowdown in domestic economic activity has eased in the second quarter (Q2) of 2024-25, and has since recovered, lifted by strong festive demand and rural activities.
Governors from the government side are seen to be leaning towards what the government views on the growth-inflation dynamic, but eventually they change their ways and integrate into the RBI culture. The internal bureaucracy at the RBI is very strong and they generally do not subscribe to the wishes of the government, according to officials. This became evident at a later stage in the cases of D Subbarao, YV Reddy and Shaktikanta Das.
The government, which expects a rate cut in the December policy review, also wants interest rates cut. Days before Das’ term ended, two Union ministers called for a cut in the repo rate ahead of the monetary policy review on December 8. Finance Minister Nirmala Sitharaman batted for “cheaper bank interest rates” to ramp up and support industries. Capacity building. Union Commerce and Industry Minister Piyush Goyal also urged the RBI to boost economic growth and reduce interest rates by looking at food prices while deciding on monetary policy.
However, against the will of the government, the RBI, which wants to bring inflation under control, has kept the repo rate unchanged at 6.50 percent. This goes against Das’s claim on Tuesday that the coordination between the government and the RBI was at its “best” in the last six years.
There was also a proposal from the government side to remove food inflation from CPI inflation to facilitate the reduction of interest rates. This has been strongly opposed by Das and RBI.
In 2018-19, after Das, who was earlier in the government, became the governor, the RBI recorded the highest surplus transfer of Rs 176,051 crore. This comes after his predecessor Urjit Patel strongly opposed handing over a higher surplus to the government. In FY2024, the RBI, led by Das, approved a massive, all-time high surplus transfer of Rs 210,874 crore, announcing a bonus to the central government.
Clearly, the government wants the RBI to cut rates to boost GDP growth. “We believe the next MPC policy in February 2025 may announce a repo rate cut of 25 bps. The RBI is taking a calibrated approach so far but as the slowdown in growth becomes more pronounced, the RBI will need to provide monetary support,” Puneet Pal, head- Fixed Income, said PGIM India Mutual Fund.