New Delhi February 6 2025: India’s new central bank governor is expected to deliver an interest rate cut in his first policy meeting, shifting the focus to boosting economic growth as global risks escalate.
Governor Sanjay Malhotra, who took charge in mid-December, is likely to depart from the hawkish approach of his predecessor, Shaktikanta Das, who kept interest rates unchanged for two years as he doggedly chased a 4% inflation target.
Most of the economists surveyed by Bloomberg predict the Reserve Bank of India will now lower the benchmark repurchase rate by at least 25 basis points to 6.25% on Friday. Some analysts say there’s even a chance Malhotra could surprise with a bigger move of 50 basis points.
The governor is chairing an almost entirely new six-member monetary policy committee. Deputy Governor M. Rajeshwar Rao is temporarily on the MPC to replace Michael Patra — who retired last month — while three external members of the MPC joined in October.
A longtime bureaucrat who was previously the revenue secretary in the Ministry of Finance, Malhotra hasn’t given any public speeches since his appointment, making it difficult to gauge his views on inflation and the currency. However, RBI insiders say he favors a more hands-off approach on the rupee than his predecessor, and has shown a willingness to allow the currency to weaken along with global peers.
Malhotra has added reason to cut interest rates after recent data showed the economy slowed more than expected and US President Donald Trump sends shockwaves through global markets with new tariff threats. A rate cut by the RBI this week would follow last week’s record tax cuts of $12 billion in Prime Minister Narendra Modi’s annual budget to juice the economy.
“Ultimately, monetary policy will have to do the heavy lifting to support growth in 2025 and beyond,” said Kaushik Das, chief economist for India at Deutsche Bank AG. Otherwise, “there is a non-trivial risk of falling behind the curve,” he said.
Chinoy said that with growth slowing to a four-year low and inflation set to moderate around the 4.5% level in the next financial year, the RBI will be more amenable to cut rates.
“With so much slack in the economy and growth below what the RBI thought, I think it clears the decks for a non-trivial amount of monetary policy easing,” he said.
A rate cut could also come with change in the policy stance to “accommodative” from “neutral,” said Aastha Gudwani, India chief economist at Barclays Plc. The RBI had changed the stance to neutral in its October policy meeting.
Rupee Slump
The RBI chief’s comments on the rupee will be scrutinized for signs he’s more amenable to allow the rupee to trade more freely.
Under Das, the central bank intervened to keep the currency within a tight range. He built up foreign exchange reserves to the fourth-biggest in the world at more than $700 billion, contributing to what many said was an overvalued currency compared with its peers. Since Malhotra took office in December, the rupee has seen a marked increase in volatility, depreciating over 3% against the dollar in the past two months.
Still, Malhotra is likely to stick to the RBI’s general stance of intervening to smooth out volatility while not targeting any specific level for the currency.
The local currency fell to a fresh low of 87.55 to a dollar on Thursday while the 10-year yield was down one basis point to 6.66%. Most analysts do not expect the rupee depreciation to deter the central bank from cutting rates.
The central bank sees a 5% depreciation in the currency pushing up inflation by 0.35 percentage points, but manufacturers and oil producers are unlikely to fully pass on costs amidst the ongoing slowdown, said Radhika Rao of DBS Group Holdings Ltd.
Bonds and Liquidity
Swap rates have now fully priced in a quarter-point rate cut after the central bank unleashed a nearly $18 billion liquidity splash last month.
However, traders say that more needs to be done to infuse extra cash into the banking system. The cash shortfall with banks rose to over 3.3 trillion rupees ($37.9 billion), its most in more than decade last month amid the RBI’s forex market intervention and tax outflows. The shortfall has since reduced to 600 billion rupees after the liquidity steps.
“Although RBI has recently turned proactive in liquidity infusion, much more is required in our view,” said Suyash Choudhary, head of fixed income at Bandhan AMC Ltd. “This is especially if any potential rate cut has to be transmitted into lending rates.”
