The week began with a jolt in the financial world as the Reserve Bank of India (RBI) announced a change at the helm. Contrary to market whispers of an extension for the incumbent Shaktikanta Das, the central government appointed Sanjay Malhotra, the revenue secretary, as the new Governor. This unexpected move has ignited speculation of a shift towards a monetary policy more supportive of economic expansion. Market analysts are increasingly anticipating a rate reduction in the February policy review.

New Guard at Mint Road

Mr. Malhotra’s extensive experience across various government departments positions him well to tackle the challenges at Mint Road. His immediate task will involve fostering consensus within the Monetary Policy Committee (MPC), especially given the impending retirement of Deputy Governor Michael Patra in January 2025. Mr. Patra, along with former Governor Das, has been a strong voice against inflation within the MPC. This hawkish stance has significantly influenced past interest rate decisions. However, the changing composition of the MPC, with new external appointments and a likely dovish Governor, suggests a potential shift in the majority view. This could pave the way for a growth-oriented approach, particularly crucial as economic growth figures have been less than encouraging.

Inflationary Headwinds

While the anticipation of a rate cut is building, the fight against inflation is far from over. The latest RBI survey of households reveals a concerning trend. Public perception of current inflation has risen, and expectations for future inflation remain elevated. This suggests that the MPC’s battle to control prices might be prolonged. The survey highlights that household inflation expectations are closely tied to food prices and housing expenses, indicating persistent pressure in these sectors. This public sentiment presents a counterpoint to the market’s rate cut optimism, reminding us that price stability remains the RBI’s primary mandate.

Global Rate Cut Winds

Interestingly, global markets are also exhibiting similar rate cut sentiments, as seen in the Kospi’s positive opening today. The Korean market mirrored gains in US tech stocks, buoyed by US CPI data that reinforced expectations of a Federal Reserve rate cut. This global context adds another layer to the RBI’s considerations. While domestic inflation concerns persist, the broader international trend towards easing monetary policy might influence the MPC’s decisions. The interplay of these domestic and global factors will be crucial in shaping the RBI’s policy direction.

Will the new Governor prioritise growth over inflation concerns? The incoming inflation data over the next few months and the composition of the rejigged MPC will offer vital clues to the direction of monetary policy in the coming year.

Image Courtesy: Business Standard (Kamlesh Pednekar)