RBI: After another status quo year, all eyes on a rate cut with new Guv at helm

Mumbai: The RBI under former governor Shaktikanta Das resisted pressures to cut interest rates through 2024 as it kept its ‘Arjuna’s eye’ trained on inflation, but the central bank under a new detail-oriented head will soon have to take a call if it can continue sacrificing growth.

Das, a career bureaucrat who in 2016 oversaw Prime Minister Narendra Modi’s highly disruptive demonetisation move, left a lasting legacy as he demitted office towards the end of 2024 after expertly navigating monetary policy for six years, the highlight of which was steering India’s recovery through the pandemic.

Sanjay Malhotra, another civil servant, was named as Das’ successor barely 24-hour before the latter’s second three-year term came to an end.

The Reserve Bank of India (RBI) under Das kept interest rates unchanged for almost two years even when economic growth slipped to a seven-quarter low in July-September quarter of the current fiscal.

With the new governor at helm, and a growing dissent within the rate-setting panel in favour of a rate cut, all eyes are now at the next review of the RBI’s monetary policy in February, and specifically the decision on rates. After his appointment earlier this month, some analysts opined that Malhotra’s arrival cements the possibility of a February rate cut, but some events, especially the US Fed’s shift to make the rate cuts more shallow and its fallout on rupee, are leading many to question if the time is ripe.

Some watchers also question if a shallow rate cut of 0.50 per cent -- as widely expected given the inflation projections -- will be of any use for economic activity, beyond the optics.

Das, who had joined the central bank after a long career as a bureaucrat where he played a key role in executing Narendra Modi government’s demonetization as well, has said that he acted as per the provisions of the statutes which stipulate focusing on inflation while being cognizant of growth.

In October 2024, the six-member Monetary Policy Committee unanimously decided to change the stance of the policy to “neutral” from “withdrawal of accommodation” earlier, but a rate cut continued to be elusive. At his last policy announcement, Das said that the growth-inflation dynamic has “unsettled”, referring to the below expectations of 5.4 per cent GDP expansion and price rise shooting beyond 6 per cent threshold in October. In central banking, there is no scope for a “knee-jerk” reaction, Das said at his last press conference after the publishing of the official GDP growth data, and also added that the “credibility” of the flexible inflation targeting framework will have to be protected going forward.