As global risks increase, the new central bank governor of India is anticipated to lower interest rates during his first policy meeting, reorienting the agenda to increase economic growth.
The hawkish stance of his predecessor, Shaktikanta Das, who maintained interest rates at the same level for two years while tenaciously pursuing a four percent inflation target, is probably going to change under Governor Sanjay Malhotra, who assumed office in mid-December.
The Reserve Bank of India is expected to cut the benchmark repurchase rate by at least 25 basis points to 6.25% on Friday, according to the majority of economists polled by Bloomberg. Malhotra might even surprise with a larger move of 50 basis points, according to some analysts.
A nearly entirely new six-member monetary policy committee is being chaired by the governor. Three external members of the MPC joined in October, and Michael Patra, who retired last month, is temporarily replaced by Deputy Governor M. Rajeshwar Rao.
It's hard to tell how Malhotra, a longtime bureaucrat who was once the revenue secretary in the Ministry of Finance, feels about inflation and the currency because he hasn't made any public statements since being appointed. However, according to RBI insiders, he has demonstrated a willingness to let the rupee depreciate alongside its international counterparts and prefers a more laissez-faire stance toward the currency than his predecessor.
Recent data revealed that the economy slowed more than anticipated, and US President Donald Trump sent shockwaves through international markets with new tariffs, giving Malhotra even more justification to lower interest rates. dangers Following last week's historic $12 billion tax cuts in Prime Minister Narendra Modi's annual budget to boost the economy, the RBI is expected to lower interest rates this week.
"Monetary policy will ultimately need to do the heavy lifting to support growth in 2025 and beyond," stated Kaushik Das, Deutsche Bank AG's chief economist for India. "There is a non-trivial risk of falling behind the curve" otherwise, he suggested.
The rate decision will be announced by Malhotra in a televised speech in Mumbai at 10 a.m. What analysts will look out for is as follows:
Trajectory Rate
We'll be watching Malhotra's policy statement and press conference carefully for indications that he is upholding his predecessor's pledge to keep inflation below the 4% target. Additionally, analysts will be closely monitoring any hints regarding the length and depth of any potential easing cycle.
The RBI will pivot this week, according to the majority of economists, but some, like Taimur Baig of DBS Group Holdings Ltd., believe the cycle will probably be brief. Others, such as Sajjid Chinoy of JPMorgan Chase & Co., believe that if the state of the world economy doesn't significantly deteriorate, it might be extended by quarter point sizes.
According to Chinoy, the RBI will be more willing to lower rates in the upcoming fiscal year as growth slows to a four-year low and inflation moderates to about 4.5%.
"Growth below the RBI's expectations and so much slack in the economy, I think it clears the decks for a non-trivial amount of monetary policy easing," he stated.
A rate cut could also result in a shift in policy to "accommodative" from "neutral," according to Aastha Gudwani, India chief economist at Barclays Plc. The RBI changed its stance to neutral at its October policy meeting.
Rupee Slump
The RBI governor's comments on the rupee will be scrutinized for indications that he is more willing to allow the rupee to trade more freely.
Under Das, the central bank intervened to keep the currency in a narrow range. He increased foreign exchange reserves to the fourth-largest in the world, totaling more than $700 billion, contributing to what many considered an overvalued currency in comparison to its peers. Since Malhotra took office in December, the rupee has seen a significant increase in volatility, losing more than 3% against the dollar in the last two months.
Nonetheless, Malhotra is likely to stick to the RBI's general stance of intervening to smooth out volatility rather than targeting a specific level for the currency. Charts
Bonds and liquidity
Swap rates have now fully priced in a quarter-point rate cut, following the central bank's nearly $18 billion liquidity injection last month.
However, traders believe that more should be done to inject additional funds into the banking system. Last month, the RBI's forex market intervention and tax outflows increased the cash shortfall with banks to more than Rs 3.3 trillion, the highest level in more than a decade. The liquidity steps have reduced the shortfall to Rs 60,000 crore.
"Although the RBI has recently taken a proactive approach to liquidity infusion, we believe much more is required," said Suyash Choudhary, head of fixed income at Bandhan AMC Ltd. "This is especially if any potential rate cut has to be transmitted into lending rates."
