New RBI Governor: 3 potential changes to track under Finance Ministry insider Sanjay Malhotra

As yet another Finance Ministry insider and revenue secretary Sanjay Malhotra takes charge of the Reserve Bank of India (RBI) from Wednesday, market experts say the selection of two career bureaucrats as RBI Governor in a row indicates the government’s comfort with having a bureaucrat rather than a technocrat at the central bank’s helm.

“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,” Nomura’s Sonal Varma said.

Pointing out that a whole lot is known about Malhotra’s views on current economic issues, the brokerage firm said three potential changes could occur under the new RBI Governor.

1) Shift towards more accommodative monetary policy

With the new RBI governor from the Finance Ministry and with fresh thinking at hand, a rate cut at the February MPC meeting is now likely cemented, Nomura said.

There is some possibility of a bigger 50 bp catch-up move upfront, though this will likely be data-driven. For now, we pencil in a 25bp cut in February and expect 100bp in total cuts to a terminal rate of 5.5% by the end-2025. With growth risks skewed to the downside, we also see the risk of a lower terminal rate,” it said.

2) Macroprudential policy

Given Malhotra’s background in the Department of Financial Services, it is possible that amid slowing bank credit growth, macroprudential policies are less pro-cyclical, the brokerage said in a report.

3) Currency management strategy

The RBI has always sought to build its forex reserves buffer (precautionary motive) and smooth out volatility – two aspects that may continue under the new management, Nomura said.

“However, it is possible that a bit more flexibility is allowed in currency fluctuations, going forward, as compared to the relatively tighter leash seen over the last year and more,” it said.

Impact on market

Nomura analysts said 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 – 75 bp is likely to quickly become the market expectation we believe (from 60bp presently),” it said.

There is likely to be some speculation over an inter-meeting cut and also a larger than 25bp initial cut.

Emkay Global said its initial discussions with some senior bankers indicate that Malhotra is straightforward in policy communication, and in his past role at the DFS, he would push banks to adopt and focus on technology.

“That said, we also note he has taken tough taxation decisions relating to capital markets. The changes/harmonization in capital gains tax treatment, with the removal of indexation benefits for real estate and debt MF gains, among others, were all implemented during his tenure as Revenue Secretary. However, interestingly, he has taken cognizance recently of the negative impact of excessive tax compliance/notices on business activity,” Emkay’s Lead Economist Madhavi Arora said.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times)