By Swati Bhat and Ira Dugal
MUMBAI (Reuters) – India’s new central bank chief Sanjay Malhotra is likely to take a growth-supportive approach over the next few months, as he joins Prime Minister Narendra Modi’s government in its efforts to pull the economy out of a slowdown.
Malhotra, who took over from Shaktikanta Das in December, cut interest rates in his first monetary policy review last week and pushed back implementation of several key banking sector rules that could have hurt credit flows to the economy.
Growth soared to 8.2% in fiscal 2024, giving Modi bragging rights over leading the world’s fastest growing major economy and spurring inflows of foreign capital.
But the rate of economic expansion in the world’s fifth largest economy has slipped sharply since, prompting investors to sell $22 billion of Indian shares since October.
A source aware of the Reserve Bank of India’s thinking said it has become clear to the bank that growth needs monetary support and it is likely to adopt a more supportive stance provided inflation continues to ease.
“Arguably the bigger change in tone between the two governors was on the outlook for economic growth. Governor Malhotra sounded more bearish than his predecessor,” Shilan Shah, an economist at Capital Economics, said.
Malhotra, who analysts said has a clear communication style while being more data-oriented, already announced a liquidity bazooka ahead of the policy review.
His decision to cut the key rate for the first time in nearly five years followed the Modi government’s announcement of the largest tax reduction in a decade to push the middle class to spend to help growth recover from the expected four-year low of 6.4% in this financial year ending in March.
For fiscal 2026, the government has forecast growth of 6.3-6.8%, while the RBI pegged it at 6.7%.
“I think all these measures were brought on by the fear that India could slip into a middle income trap and the urban middle class – a key driver of growth in recent years – could go into a funk,” said independent economist Abheek Barua.
“What these measures do is prevent a further slipping of growth and avoid growth from settling into a relatively low 6-6.4% kind of rate,” he said.
NEW DELHI TO MUMBAI
Like his predecessor, Malhotra was a high ranking official in the finance ministry before he was appointed the head of the central bank in Mumbai.
In the months before Das’ term ended, the finance ministry had expressed concern over excessive tightening of financial sector rules and, in a rare public comment, blamed part of the slowdown on the central bank’s policies.
Malhotra, at his first policy review, delayed the implementation of two of these proposed rules by at least a year.
“We recognise that just like there are no free lunches, regulation to enhance stability and consumer protection too is not devoid of costs,” Malhotra said.
“We will keep this trade-off in mind while formulating regulations,” he added.
At a joint press briefing by finance minister Nirmala Sitharaman and Malhotra over the weekend – customary after the annual budget – the two struck a coordinated note.
“Whether it is inflation or growth, monetary and fiscal monetary policies must both move in tandem like wheels of a vehicle to ensure more benefit for the economy and the people,” Sitharaman said.
Emails sent to the finance ministry and the RBI did not get any response.
The new RBI governor confirmed a regime shift on rates, liquidity, forex and regulation, said Nomura economists who expect 75 basis points of further rate cuts and more liquidity easing.
Malhotra, however, was careful not to de-emphasise the central bank’s inflation focus at a time when global bond investor interest in India is high due to its government debt being included in overseas bond indices.
When asked whether the RBI wants to align retail inflation to a 4% target or if it will be comfortable with it staying within the 2-6% range provided for within India’s flexible inflation targeting framework, Malhotra’s response was unambiguous.
“When you take an exam, do you aim for 100% or 40%?,” he said, making clear that the central bank will not ease up on inflation control.
However, despite the coordinated policy push, economists do not expect growth to return towards 8% levels.
Short-term growth-boosting measures may spark inflation instead, said Indranil Pan, chief economist at domestic lender Yes Bank, who saw the 8.2% growth rate in 2023-24 as an aberration.
“If you are targeting 8.2% (GDP growth) without doing much on the supply side and just pushing the demand side, you will again get inflation,” said Pan.
($1 = 87.6270 Indian rupees)
(Reporting by Swati Bhat and Ira Dugal in Mumbai; Editing by Kim Coghill)
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