What will new RBI governor Sanjay Malhotra face?

Reserve Bank of India (RBI) Governor Sanjay Malhotra during a press conference on Wednesday, December 11, 2024, in Mumbai, India. He will work to safeguard economic stability and policy continuity in his role. Photographer: Dhiraj Singh/Bloomberg via Getty Images

Bloomberg | Bloomberg | Getty Images

This report comes from this week’s CNBC “Inside India” newsletter, which brings you timely, insightful news and market commentary on the emerging powerhouse and the big players behind its meteoric rise. Like what you see? You can subscribe here.

big story

Just over twelve months ago, thousands of Indians gathered at Delhi’s Red Fort to hear Prime Minister Narendra Modi deliver a speech on the momentous occasion of India’s 75th Republic Day.

His message is clear: Viksit Bharat 2047 — Commitment to make India a developed country by 2047.

The idea of a “developed India” is not new. In fact, this statement has been mentioned many times during the 10 years since Prime Minister Modi took office.

The plan looked on track in January: India was growing faster than other major economies and its The stock market has surpassed Hong Kong to become the fourth largest in the world, and dozens of technology unicorns are about to go public.

Twelve months on, investors and economists are worried about high inflation levels, falling household spending, slow job creation and a lack of private investment. It certainly doesn’t help that India’s latest second-quarter gross domestic product (GDP) data came in lower than expected.

The government’s latest move to replace Reserve Bank of India (RBI) Governor Shaktikanta Das with Sanjay Malhotra appears to be well thought out., But it is a subtle solution to India’s economic weakness.

Malhotra had previously served as tax secretary in the finance ministry. His appointment surprised some as Das’s term was expected to be extended.

Shilan Shah, deputy chief emerging markets economist at Capital Economics, noted that Malhotra’s leadership is expected to “bring a new direction to the Reserve Bank of India.” Analysts such as Shah said this includes a rate cut as early as February 2025.

India’s benchmark interest rate is 6.5%, the same level as when Das took over the reins of the Reserve Bank of India in late 2018.

The Reserve Bank of India wrote in its monthly report on economic conditions in November that high inflation is “eroding urban consumer demand, corporate earnings and capital expenditure” and if left unchecked, will “undermine economic growth prospects.”

Since then, the central bank lowered its GDP growth forecast for the fiscal year 2025 ending in March from 7.2% to 6.6% at its latest monetary policy meeting.

The incoming governor said little about India’s growth versus inflation debate in his first public speech. However, he emphasized the key role of stability, trust and growth in guiding central bank decisions.

“It may not be appropriate to start with the Bodyguard, the Fool and the New Yorker on day one,” the 26th RBI Governor said in a statement. On-site press conference will be held on Wednesday. (For the uninitiated, these are cricket terms that allude to bowling in an unconventional manner.)

“As we move into Amrit Kaal and realize the vision of Viksit Bharat by 2047, our economy still needs to grow. We have a huge responsibility to ensure that this country continues to grow,” Malhotra added. The phrase Amrit Kaal roughly translates to “the age of the elixir of life.”

As investors ponder how Malhotra will carry out his duties in 2025, CNBC’s “Inside India” asked three market watchers about their expectations and the decisions they would implement if they were governor.

A ‘tricky place’

Economist Shumita Deveshwar described the RBI’s current situation as a “thorny problem”.

On the one hand, the central bank is grappling with “potential spillovers from high food prices to broader inflation that cannot be controlled directly through monetary policy,” said TS Lombard, chief India economist.

Another growing concern is India’s “weaker-than-expected growth momentum,” she added.

For Deveshwar, the RBI’s “middle ground” now is to lower the Cash Reserve Ratio (CRR) to increase liquidity and balance India’s growth and inflation challenges. CRR is the minimum proportion of total deposits that commercial banks must keep with the central bank in the form of cash or deposits. The Reserve Bank of India cut the CRR by 50 basis points to 4.5% in its recent policy meeting in a bid to boost liquidity, credit flows and economic growth.

At the same time, Deveshwar said the central bank must start cutting interest rates before February to reduce financing costs to boost India’s economic growth, thereby stimulating consumers and businesses to increase investment and borrowing.

“Turn”

Vivek Subramanayam, founder and chief executive of technology holdings, an investment bank and asset management company, said in a one-on-two approach that as governor he would take a “gradual, targeted approach” to The practice of lowering interest rates permanently.

Subramanayam explained: “A few rate cuts may result in a total of up to 200 basis points of rate cuts, but I would calibrate and gradual them so as not to have an impact in terms of inflation and currency depreciation.”

“Controlling inflation and devaluation is more important than maximizing growth rates,” he added.

Looking ahead to 2025, he believes the Indian economy is only “turning around and will gradually re-accelerate as monetary and fiscal policy eases and investment in growth increases.”

“Still a composite machine”

Elsewhere, Global X ETF’s Malcolm Dorson echoed Subramanayam’s optimism on India.

“Broadly speaking, India remains a compounding machine and we view the recent pullback as a unique opportunity to step in with conviction,” the senior portfolio manager noted.

For now, he expects the RBI to start cutting interest rates only when “they think inflation is under control.”

“The central bank has just lowered the CRR rate to improve liquidity and has essentially sent a signal that a rate cut is coming. As investors, we are not looking for meaningful change,” said Dolson, who manages the firm. Global X Active India ETF explained. Mirae Asset, the parent company of Global X, is One of the largest foreign asset management companies in India.

Regardless of how Malhotra leads the RBI, the senior portfolio manager said the South Asian powerhouse “looks as attractive as ever”.

He stressed that China’s stimulus measures were impressive and the additional headwinds posed by US President-elect Trump were “a tailwind to the Indian story”.

Dolson called the recent GDP statistics a “one-off” decline and predicted India’s average growth rate over the next five years would be 6% per year. To this end, he expects “meaningful growth” in government spending over the next six months.

“Even if the government misses budget, this will allow officials to point to ‘fiscal consolidation’ that markets should also like. It feels like a ‘win-win’ (for the Indian economy),” Dolson added.

need to know

India’s inflation rate has slowed from a 14-year high. the country’s The overall inflation rate in November was 5.48%, slowing down from November’s high of 6.21%. The latest data was also lower than the 5.53% expected by economists polled by Reuters, with the Reserve Bank of India holding interest rates at 6.5% at its monetary policy meeting last week.

Outbound travel from India is expected to surge over the next decade. According to the World Travel and Tourism Council, outbound tourism expenditure by Indian tourists in 2023 was US$34.2 billion. However, Hilton Asia Pacific president Lan Watts believes that current levels are “minuscule” compared with future levels. “India’s story is right in front of us,” he said, adding, “Indian outbound travel will be the story of the next decade.”

What happened to the market?

Indian stocks edged lower this week. this Nifty 50 index It is down 0.5% this week to 24,548.7 points. The index has gained 13% this year.

Compared with last week, the benchmark 10-year Indian government bond yield was unchanged at 6.73%.

Kunal Vora of BNP Paribas said on CNBC television this week that domestic investors were absorbing a lot of the volatility from last week’s news reports. Vora added that while they are currently cautious about investing in Indian equities, the stock market has shown “high resilience”.

Meanwhile, Ramiz Cherat of Switzerland-based Vontobel Asset Management said the slowdown in India’s growth was “largely temporary” as the central government is likely to increase spending on infrastructure such as roads and rail .