Analysts expect smooth transition in RBI leadership, anticipate rate cut in February
With a new Chairman and a new member from the RBI side on the Monetary Policy Committee, global economic research agencies do not expect any change in the anticipated policy interest rate cut in February.
The government on Monday appointed Revenue Secretary Sanjay Malhotra as the new RBI Governor for a period of three years. As the ex officio post, he will also head the six-member rate-setting panel, better known as the Monetary Policy Committee (MPC). The committee has three members from the RBI, including the Chairman, while three are external members. The term of the second RBI member, Deputy Governor Michael Patra, is coming to an end in January. Earlier in October, the government appointed Ram Singh, Saugata Bhattacharya, and Nagesh Kumar as new external members of the MPC. Therefore, the February meeting of the MPC will be more like a newly constituted one.
Post the announcement of the appointment, in a note prepared by Aastha Gudwani, Shreya Sodhani, and Amruta Ghare, Barclays said: “We expect the transition to be smooth and seamless, and anticipate fiscal-monetary policy coordination to continue in the new regime as well.” The MPC under outgoing Governor Shaktikanta Das retained the policy interest rate unchanged for 11 consecutive times, including the last one in December.
“In our view, the worst of quarterly growth readings and peak inflation are now behind us. In Q3 FY2024-25 (Oct-Dec), high frequency indicators of economic activity are showing some signs of rebound in momentum. For November, we expect CPI inflation to moderate to 5.4% y/y, from 6.2% in October. We expect the MPC to derive comfort from this and cut the policy repo rate by 25bp on 7 February,” a note by Barclays said.
Echoing the same sentiment, a Nomura research note, prepared by Sonal Varma and Aurodeep Nandi, said that the appointment of the new RBI governor will likely be taken dovishly by the market. The market had been questioning why the decision had been left so late and why it came after the last RBI policy meeting last Friday. “We believe the market will move to price in a very high probability for a cut in the February meeting, while also moving down the pricing for the terminal rate – 75bp is likely to quickly become the market expectation, we believe (from 60bp presently),” it said.
According to the note, there is likely to be some speculation over an intermeeting cut and also a larger-than-25bp initial cut. While the market will likely speculate on this, “we are closely watching liquidity operations going forward,” it said.
Barclays’ note has high regard for Malhotra. “We see him continue the practical approach that has served the RBI MPC rather well in turbulent times instead of doing anything radical. We also acknowledge his pro-growth outlook – he was recently quoted as saying ‘Revenue comes in only if there is some income and so we have to be very cautious that in the process, as they say, ‘do not kill the golden goose,’” the note said.
Nomura’s note also expects better coordination between Mint Street and the North Block. “In the past, when bureaucrats have joined the RBI, we have observed a greater alignment with the government’s way of thinking in the initial period, but over time this changes with more alignment seen with the RBI’s institutional thinking,” it said.