MC Analysis | Three reasons why RBI MPC meet outcome will be keenly watched on February 7

Sanjay Malhotra

The Reserve Bank of India’s monetary policy and the RBI Governor’s commentary thereafter is one of those events, which no one can pass over as a non-event, especially in the last 36 times. One way or the other, the central bank chief has ensured that there’s some takeaway for every one each time. Today's policy will be no less. If any, the interest from market participants – whether equity, debt or currency, and bankers will be higher than before for three reasons.

First by the new governor:

Being the first from the newly appointed governor, Sanjay Malhotra, his commentary will be closely tracked by market participants. Given his immediate past as India’s revenue secretary and his image as a pro-business bureaucrat owing to some of the reforms he instrumented in his past roles, the banking sector has hopes of him replicating the same in the financial services sector as well. There are three critical norms pending the regulator’s final nod – namely on project finance, introduction of expected credit losses norms and the proposed revisions to computation of liquidity coverage ratio. There is also a major push back to free up capital by relaxing the risk weights on a few asset classes introduced in November 2023. While the industry does not expect all these restrictive norms and proposals to be removed in a stroke of a brush, commentary on the direction of regulatory thinking will be appreciated.

Stepping up of Rajeshwar Rao

February policy will be one where it would be a fairly newly committee – first for the governor and deputy governor Rajeshwar Rao who took over the monetary policy portfolio from Michael Patra and third for the external member. It was anticipated that Patra’s position would be filled in by February 4 given that according to news reports, the screening of candidates for his role has concluded. Seen as a position expected to be filled by a non-RBI candidate, this is possibly the third time that an existing deputy governor is filling the shoes of a deputy governor specifically assigned to take charge of rate setting. This brings us to the most important aspect of the MPC: will there be a rate cut?

Should we factor an anti-climax?

A 25 basis points rate cut seems to be a foregone conclusion. There are a few optimists who expect a 50 bps reduction in benchmark repo rate as well, as it is the first policy of Malhotra and he might want to hand out some extra goodies right after the government opening its wallet in the gone by union budget. But here are a few points to ponder. Inflation may be around the five percent mark, but the RBI has been keen to see this number at four percent. This has been non-negotiable for the RBI since mid-2024 when the demand for a rate cut first started. With a fairly new committee in place, especially regulatory representatives, will there be a drastic change in stance just yet? The budget has also promised lower income tax for those at or less than Rs 12 lakh of annual income starting April 2025. This could spur spending, thereby taking care of the issue of falling consumption demand. The MPC may want to gauge the impact of this measure before handing out a rate cut. Thirdly, whenever the system was in need of liquidity the RBI interventions have been timely and just in the right measure. If that is the case, should process of rate setting be used as tool to moderate liquidity? Indian Rupee isn’t giving much comfort to the economy at large given how it’s plunging to a new low almost daily in the recent weeks. With many moving parts in the works, if the MPC opts for a rate cut, whether 25 bps or 50 bps, the thinking of the regulatory authorities will be very critical for the markets at large to understand the forward trajectory.