MC Analysis | Sanjay Malhotra, who succeeds Shaktikanta Das as new RBI Governor, has a tougher task

sanjay malhotra

India has had a prolonged period of calmness, fiscally and monetarily. That is a good welcome note for Sanjay Malhotra, the newly appointed Reserve Bank of India (RBI) Governor. But that shouldn’t be construed in any way that Malhotra possibly has an easy task ahead of him.

If any, his work might be as difficult or even more difficult than his predecessor Shaktikanta Das, and here’s why.

Rate action

Every incoming RBI chief bears the expectation of a rate cut, whether from the market and/or the government. The only exception was Raghuram Rajan, but those were different times and at the peak of taper tantrum.

As far as Malhotra is concerned, given how the bond market is appreciating, the expectation has already been set clearly for a rate cut in the central bank's February 2025 Monetary Policy. But, here’s the catch: possibly for the first time ever, Das, in what can now be comfortably called as a farewell speech after the MPC meeting on December 6, repeatedly emphasised on the importance of working within the framework of the RBI Act in tackling inflation. India’s law clearly permits a toss-up between core inflation or food inflation, for the purpose of rate-setting. It is a combination of both.

As one of the economists with a foreign bank put it, Malhotra would be in a unique position of having to choose between growth and inflation. “In my view, the RBI, as an institution, is much larger than what we think it to be, and, ultimately, the institution’s decision will prevail on these matters. Therefore, to take a different stand on inflation, much would depend on how it pans out from now to January 2025. If inflation is tamed, a rate cut is possible. Otherwise, it is still too early to slash rate,” he said.

Also, a near-term bounceback in GDP growth may push the need for an immediate rate cut.

Fiscal discipline

If this is on the monetary side, the bond market will also closely watch the fiscal actions under the new governor.

Fiscal prudence was another factor which was very efficiently maintained under Das’s leadership. One of the reasons why India meandered through the pandemic very swiftly was because of its financial prudence. In an urge to improve growth, will there be any compromise on this side is something the market will closely watch.

Das also has the distinction of having returned the maximum dividend to the government during his tenure. FY24’s Rs 2 lakh crore-plus dividend is a record till date. Dividends from the central bank has been a huge helping hand for governments during tough times and otherwise. Expectations would be high from Malhotra to maintain this benchmark, especially given his background as a revenue secretary, and also as someone who has been instrumental in improving the tax-efficiency of the country in his earlier stints.

Banking reforms

They may never be vocal about it, but one question in the minds of bankers, especially those in leadership roles is whether the regulator is pressing the pedal too hard on them. A spate of 14 bans on banks and non-banks from 2020 till date, stringent draft laws on project finance and liquidity-related aspects, an iron-clad supervisory mechanism and having a last say on what the chief executives of banks and non-banks should earn are a few things which haven’t gone down well with bankers lately.

Some say much has to do with the institutional memory of back-to-back bank failures in 2019 – 2020. Will Malhotra infuse a fresh line of thinking to tackle some of these concerns? There are also two important divestment process to handle – that of IDBI Bank where the ball was set rolling in 2020, and extending a helping hand to the State Bank of India (SBI) in finding a good buyer for its meaty 24 percent stake. If news reports are anything to go by, both deals are facing regulatory hurdles. Malhotra may have to take those important decisions to ensure that the supply of high-quality equity capital into the banking system is never a challenge, especially for regulatory reasons.

It is for these reasons that while Das’s tenure will be remembered as a six-year-long battle against the unknowns, Malhotra’s will be no easy sail as perceived by many.