India’s rate cut could come as early as February after surprise RBI governor pick

India has appointed a new central bank governor to replace longtime head Shaktikanta Das in a surprise move that some market watchers say bolsters the prospect of rate cuts early next year.

The new Governor of the Reserve Bank of India, Sanjay Malhotra, currently serves as the Revenue Secretary in the Ministry of Finance and will have to deftly balance the need to prevent one of the fastest growing major economies of the world stutters while keeping a lid on stubbornly high inflation.

Malhotra, an alumnus of the Indian Institute of Technology and Princeton University, has recently raised concerns about the health of the economy. Analysts say Malhotra’s surprise appointment could start a shift toward more dovish monetary policy in an economy expected to become the world’s third largest before the end of the decade.

Das, on the other hand, has been widely regarded as the most hawkish member of the RBI’s Monetary Policy Committee, so his departure could influence the MPC’s overall stance, said Shilan Shah, deputy chief EM economist at Capital Economics in a note on Monday.

“Mr. Malhotra’s appointment could mark a new direction for the RBI,” Shah added.

Economists at Capital Economics now expect a 25 basis point cut in India’s repo rate at Malhotra’s first MPC meeting in February, if not at a previously unscheduled meeting. The group had earlier predicted that the rate cut would come in April under Das’ leadership.

Citi economists, who are already predicting an RBI interest rate cut in February, echoed this view. Markets also seem to be sharing their expectations for a more flexible monetary policy.

India’s 10-year bond yields fell 2 basis points to 6.699% on Tuesday, signaling market expectations for a rate cut, while the rupee was near record lows at 84.83 against the dollar, according to LSEG data.

Das will leave his post as one of the RBI older governors since India gained independence from Britain in 1947.

During his tenure, he led India’s financial sector through a period of recovery, normalized the RBI’s relationship with the government and steered the economy through the Covid-19 pandemic.

However, the economic context has become more difficult recently. India’s economy grew on its own slower pace in seven quarters in the three months to September, while inflation exceeded the central bank’s 6% tolerance band for the first time in more than a year in October.

The weak economy had spurred calls for lower rates, even from senior government officials.

According to local media reports, in November, the Union Minister of Commerce and Industry Piyush Goyal urged the RBI to cut rates to boost growth, while Finance Minister Nirmala Sitharaman was also calling for it more affordable interest rates to support local industries.

In its December meeting, tthe MPC voted by a margin of 4:2 to keep the policy repo rate unchanged at 6.50%.

While the central bank had revised up India’s GDP growth forecast for fiscal 2025 to 6.6% from 7.2% in October, Das had expressed confidence that the slowdown of the national economy had “all the bottom” in the September quarter.

However, the Finance Ministry has taken a less positive view of growth than the RBI, which could influence incoming governor Malhotra’s thinking as he heads into his first monetary policy meeting, according to Dhiraj Nim, strategist and India FX Economist at ANZ.

ANZ had already forecast the RBI would carry out a total of three rate cuts from February 2025, with inflation excluding food weak enough to pursue rate cuts to support growth.

“The appointment of the incoming governor has only increased the expectations that it will happen,” Nim said.

— CNBC’s Ruxandra Iordache and Anniek Bao contributed to this report.