Moneycontrol Pro Panorama | Change or chaos?

The change in the RBI after Sanjay Malhotra took the helm as Governor seems to be of the good kind.

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There are numerous historical examples that show that leadership change can lead to a marked alteration in the approach and perspective of an organisation or even a country. After all, the process of democratic voting and electing leaders is enshrined in the idea of bringing about a change. A new leader brings fresh perspective and if we are lucky, a better way of doing things. But sometimes, the change is too much and crosses over to chaos.

The change in the Reserve Bank of India (RBI) after Sanjay Malhotra took the helm as Governor in December 2024 seems to be of the good kind. In his first monetary policy committee meeting and the interactions with media thereafter, Malhotra came across as a policymaker more sensitive to growth compulsions and willing to relook at inflation in a different context. A change in the approach of regulation was also observed when his deputies appeared more confident that policy changes have worked and can be dialled down in future.

The central bank’s latest move to restore risk weights to their relaxed levels on bank loans to non-banking financial companies (NBFC) and microfinance institutions bolsters the argument that the new Governor is more willing to lend a helping hand to growth. Dinesh Unnikrishnan detailed the implications of this easing here. As such, the evolution of credit growth of both NBFCs and banks in the past quarters after the risk weights were hiked in November 2023 has given enough reason to dial them down. Our Chart of the Day here details the two data points that could have pushed the banking regulator to ease risk weights.

A leadership change is taking place in another regulator: the Securities and Exchange Board of India (Sebi). Tuhin Kanta Pandey, the former finance secretary, will take over as Sebi chief from Madhabi Puri Buch today. Pandey, a civil servant, is known to be a stickler for rules which sits well with the capital markets regulator’s efforts to bring in some discipline among investors. Buch too had spearheaded a series of measures to clamp down on exuberance in equity trades, especially the derivatives market where investors tend to get burnt more. Will Pandey bring in a fresh approach? Only time will tell, but stakeholders are already expecting new things from the new chief and some relief from old, tightened rules. Of course, he must fix some existing problems like the discontentment among Sebi employees. That too might need a fresh approach.

Leadership changes also mean times of uncertainties for markets. This uncertainty is a trade-off for good things to come where the new head brings in novel ideas or at best turns around the approach towards existing concepts. In the case of the RBI, the markets seem to have gotten a clear idea of how the new chief interprets the economic dynamics. It may become clear what Pandey would bring into Sebi within months as well.

But sometimes leadership changes bring more uncertainty which becomes a problem for the companies.

Investors of some of India’s private sector banks had to grapple with uncertainty in the past four years as several of them went through leadership changes. Kotak Mahindra Bank, Federal Bank, and RBL Bank all went through leadership changes and the uncertainty weighed on their valuations for varied amounts of time. India’s FMCG major is facing a similar situation currently. Ravi Ananthanarayanan breaks down how Unilever CEO's unexpected exit affects HUL in his piece here.

Finally, some leaders bring more chaos than just a novel approach. When the fine line between change and chaos is crossed, widespread market tantrums and wild movements ensue. Donald Trump’s accession to the US presidency is more chaos than change. Trump has in just the first few weeks of his term levied steep tariffs on trading partners, shifted the US’s policy towards Russia and left some of America's allies seething.

Meanwhile, US equity markets have begun to feel the effect of these measures and are starting to get more volatile. Of course, emerging market economies have felt tariffs more acutely, given they are at the receiving end of it. Equity valuations have taken a knock, exchange rates have depreciated, and the overall global economic growth looks more in jeopardy now than before. Indian equities are trading below their long-term valuations now as this piece points out. We take a look at how Trump’s tariffs can bother the Indian agrochemical space here.

Until the tariff trouble eases, investors would find it very difficult to sit back and relax on valuations.

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Aparna Iyer
Moneycontrol Pro