India's new central bank governor, Sanjay Malhotra, is set to implement significant changes in the country's monetary policy as he prepares to cut interest rates during his first policy meeting.
This move, analysts believe, will mark a shift in focus from controlling inflation to stimulating economic growth amidst rising global risks and signs of slowing domestic economic activity.
Governor Malhotra, who took over from his predecessor Shaktikanta Das in mid-December, faces a challenging economic landscape.
After years of prioritising inflation control and maintaining interest rates at elevated levels, the new governor’s approach is expected to take a more growth-oriented direction.
His predecessor, Das, had followed a strict policy of keeping interest rates high in a bid to meet a 4% inflation target. However, with the economic situation evolving, Malhotra is poised to recalibrate this policy.
Economists are largely expecting the Reserve Bank of India (RBI) to announce a 25 basis point reduction in the benchmark repurchase rate, lowering it from its current level of 6.50%.
Some analysts have even speculated that Malhotra might surprise the markets with a more substantial rate cut of up to 50 basis points. The decision is set to be revealed on Friday, and it will be closely scrutinised as it will likely set the tone for India’s monetary policy for the coming months.
The global economy, especially the international trade environment, continues to show signs of instability. There have been increasing concerns about trade tensions between major economies, including the United States and China, which have created a ripple effect on the global financial system.
These risks have not only affected global markets but have also had a notable impact on India’s economy. The country has experienced slower-than-expected growth, and inflationary pressures have begun to ease, paving the way for the central bank to focus on growth stimulation.
In the wake of these external uncertainties, the RBI is being urged to adopt a more flexible approach. The outlook for India’s economy has shifted from a focus on strict inflation targeting to balancing growth concerns.
The recent data indicating economic slowdown further bolsters the case for a rate cut, as businesses and households are feeling the strain of higher borrowing costs and slower consumption.
A reduction in interest rates is expected to provide some relief by lowering the cost of credit, thus encouraging investment and consumption.
Governor Malhotra’s first monetary policy meeting will also mark the debut of an almost entirely new six-member monetary policy committee (MPC).
The committee, which plays a crucial role in shaping the RBI’s policy stance, will now be operating under new leadership and with a significantly altered composition.
Deputy Governor M. Rajeshwar Rao has temporarily stepped into the MPC to replace Michael Patra, who retired last month, while three new external members joined the committee in October.
These changes are expected to bring fresh perspectives and could lead to shifts in the way policy decisions are made.
Despite the anticipated rate cut, analysts caution that Malhotra’s decisions will need to balance the need for economic stimulus with the goal of maintaining financial stability.
While there is room for rate cuts due to the easing of inflation, the RBI must tread carefully, considering the broader global and domestic factors at play.
The central bank’s ability to navigate these challenges will be crucial in ensuring that any rate cuts do not result in unwanted side effects, such as asset bubbles or excessive inflationary pressures in the long run.
Overall, Malhotra’s first policy announcement is expected to be a defining moment in his tenure as RBI Governor. By shifting away from the aggressive inflation-fighting stance of his predecessor, Malhotra is likely to pave the way for more growth-centric policies.
However, the future of India's monetary policy remains closely tied to global economic conditions, and Malhotra’s ability to respond to these challenges will determine the success of his policy adjustments.
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