India’s new central bank governor has marked his first 100 days in office with a growth-friendly approach to monetary policy, suggesting he’ll be willing to cut interest rates further and keep liquidity flush as the economy braces for trade turmoil.
Since taking office in December, Sanjay Malhotra has reduced interest rates for the first time in five years, injected nearly $60 billion into the banking system, allowed the rupee to slide, and eased restrictions on bank lending. That’s a departure from the hawkish stance of his predecessor, Shaktikanta Das, who kept interest rates unchanged for more than two years to curb inflation, an approach that the government said was partly to blame for the economy’s unexpected weakness last year.
Officials in New Delhi say a slowdown in inflation is giving Malhotra more room to cut rates now, which makes sense to do given rising global trade tensions. The government wants the Reserve Bank of India to loosen policy since economic conditions remain challenging, with credit growth worsening due to tight liquidity, the officials said, asking not to be identified in order to discuss internal matters.
While officials haven’t given any explicit instructions to the RBI, they said bank executives met with the monetary authority in the past two months and raised concerns about their dwindling ability to lend, according to the people.
Malhotra, a former top official in the Finance Ministry, has clearly flagged his intention to boost the economy. “There is a need to preserve the high growth momentum, while maintaining price stability, necessitating monetary policy to use various policy instruments to maintain the inflation-growth balance,” he said at the first monetary policy meeting he chaired in February, according to the minutes.
The new governor has also pushed back on proposed rules that would require banks to hold more liquid assets, and lowered risk weights for bank lending to non-bank finance firms, two measures that would help spur credit growth.
Concerns about a slowing economy is underpinning that approach. Growth probably slowed to 6.5% in the fiscal year through March, the least since the global pandemic, according to statistics ministry forecasts. The government expects growth of 6.3% to 6.8% for the year starting April, though that’s still short of the 8% it says is needed to meet Prime Minister Narendra Modi’s goal of making India a developed country by 2047.
The majority of market watchers anticipate further easing measures from the RBI, which would align with the government’s desire to revive growth.
“While the RBI’s new governor has been quiet on his policy preferences, it’s clear he’s keen to revive the Indian economy to exceed 6.5% growth through a package of rate cuts, liquidity injections and regulatory easing,” said Samsara Wang, Asia sovereign debt analyst at PineBridge Investments Asia Ltd. in Hong Kong. “Bottom line, monetary policy is going to be more supportive of growth and more balanced on banking regulation.”
Economists are adding to their bets on rate cuts this year, with those at Citigroup Inc. and Deutsche Bank AG flagging the possibility the central bank will change its policy stance to accommodative at its next meeting on April 9.
Among possible further steps to boost growth, the RBI will need to inject 2 trillion rupees ($23.3 billion) of cash into the financial market via tools such as bond purchases and foreign-exchange swaps in the financial year starting April, according to IDFC FIRST Bank Ltd.
Maintaining Stability
From the RBI’s perspective, Malhotra hasn’t differed from the central bank’s stated mandate to maintain price stability, while keeping growth objectives in mind, according to a person familiar with the matter, who asked not to be identified because of the sensitivity of the matter. Irrespective of who is in charge, the central bank’s core philosophy doesn’t change, the person said.
The RBI and Ministry of Finance didn’t immediately respond to requests to comment.
Investors are positioning for further policy easing. Global funds such as PineBridge are looking to add to their India bond positions, while Brandywine Global Investment Management is long Indian bonds via supranational ones, saying local yields are expected to fall. Overseas funds have bought a net $5.9 billion of rupee-denominated debt this year even as they offloaded $14.7 billion of equities.
“We believe that the policy stance of the government and RBI are clearly veering towards stimulating growth and consumption demand,” said Jalpan Shah, head of fixed income at Trust Mutual Fund in Mumbai. “These steps seem positive for growth, both for the bond market and risk assets like equities.”
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