New RBI Governor Sanjay Malhotra set for some tightrope walking

Bengaluru: The new boss on Mint Road has arrived at a very critical juncture for the Indian economy. Career bureaucrat Sanjay Malhotra takes charge of the Reserve Bank of India (RBI) at a time when growth has slipped and food inflation remains stubbornly elevated.

While high levels of NPAs due to indiscriminate corporate lending do not pose a problem anymore, the central bank has a worry in unsecured retail lending. Malhotra will have to be watchful, especially at a time when new fintechs are proliferating. Additionally, the rupee’s continued fall would call for sustained RBI intervention.

Then again, while addressing these issues, Malhotra will have to keep the executive at arm’s length to preserve institutional independence, especially in the matters of monetary policy.

His appointment as the 26th Governor of the RBI also comes with a key message: The grip of the civil services over India’s regulators is stronger than ever. The tenures of the last two trained economists who helmed the central bank - Raghuram Rajan and Urjit Patel - saw a breakdown of relations between the government and RBI.

With Rajan, many in the government believed that he had overstepped his remit by commenting on matters outside the purview of a central bank chief. In the case of Patel, a circular issued by the RBI on February 12, 2018, nullified all previous norms of resolution of bad loans, replacing them with much stricter rules.

The calls for more dividends from the RBI to the government did not help either. Relations soured between the RBI and the Finance Ministry to an extent that the Prime Minister’s Office had to step in a few times.

Inflation vs growth

“The challenge for the new governor will be on how to strike a balance between monetary policy and growth,” Devendra Kumar Pant, Chief Economist, India Ratings, told DH.

India’s July-September quarter GDP growth came in at a seven-quarter low of 5.4 per cent, primarily hurt by a slowdown in manufacturing and private consumption. This put pressure on the Monetary Policy Committee to cut rates during its December meeting, which was Das’ last as chair of the MPC.

Yet, inflation remains above the RBI’s comfort zone. India’s headline retail inflation eased to 5.48 per cent in November after surging to a 14-month high of 6.21 per cent in October, as rise in vegetable prices softened due to the arrival of new produce. 

Malhotra, who is a former Revenue Secretary in the Finance Ministry, will chair his first MPC meeting in early February.

“The need is to focus more on growth. Because though inflation is above the RBI’s comfort level, a large part of this is because of vegetable prices. If you exclude vegetable prices, then inflation for the whole of this year has actually been below 4 per cent,” Rajani Sinha, Chief Economist at CareEdge, told DH.

“If vegetable prices start correcting, there is scope for RBI to cut rates. It should now look beyond food inflation,” she said.

The urban slowdown, as evidenced in sectors like real estate, FMCG and automobile and two-wheeler sales, has dissipated somewhat in the festive season and most economists expect the second half of FY25 to be stronger than the first.

Other concerns

There are still some headwinds though, most prominent being the direction of US trade policy under Donald Trump. “It is as the world is weighing what Trumpnomics will mean this time around, that Sanjay Malhotra becomes the 26th man to helm India’s central bank,” wrote Soumya Kanti Ghosh, Chief Economic Advisor at State Bank of India, and a member of the Sixteenth Finance Commission.

There are other issues as well. India’s Chief Economic Advisor V Anantha Nageswaran pointed out recently that while corporate earnings have risen substantially, that has not reflected on wages and salaries. As per him, this is one of the reasons for the demand squeeze.

Other experts see interest rate as a very limited tool, be it for muting inflation or supporting growth, especially at a time when the government is shouldering the bulk of the investment spend, as the private sector continues to be cautious.

“Low real interest rate is a necessity but not a sufficient condition for investment demand. When demand is not growing, corporates may not invest. What is needed is broad-based investment,” Pant said, adding that the chances of a rate cut in FY25 are rare.

The new Governor will also have to be watchful of the stresses to the banking system, especially unsecured retail lending.

“The jump in retail lending is a combination of factors. The spending pattern in India is changing, the new generation is more consumption driven. With digital lending and fintechs coming into the picture, it is becoming easier to take loans. The RBI is being cautious on this front, because this kind of lending can lead to bubble forming,” CareEdge’s Sinha said.

Analysts also expect the RBI to continue intervening in the forex markets as the rupee continues hitting new lows. Sinha believes that the central bank, while looking to curb volatility, can be comfortable with the currency slipping further, as China may also let the Yuan slip against the dollar.