When will new RBI governor Sanjay Malhotra cut rates? Brokerages weigh in

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A change of guard at the Reserve Bank of India (RBI) has ignited hopes that the new governor, Sanjay Malhotra who begins his three-year innings at the Mint Street on December 11, could cut rates sooner-than-expected.

 

The appointment, according to analysts at UBS, comes as a surprise to financial markets, as consensus had been leaning toward an extension for Shaktikanta Das by at least a year. 

 

That said, the change in RBI Governor will likely be followed by an appointment of a new RBI Deputy Governor (Dr. Michael Patra’s term ends on January 15, 2025). With five out of six Monetary Policy Committee (MPC) members relatively new (three new external MPC members joined in October 2024), analysts at UBS feel, could add an element of volatility to the markets amid rising global uncertainty related to Trump administration tariff proposals.

 

Here's how leading brokerages have interpreted the development, and their expectations from Sanjay Malhotra as regards  key rates and maintaining a balance between growth and inflation.

 

UBS

 

With the new Governor coming from the Ministry of Finance, market participants could be inclined to think that might lead to a stronger role for the government in monetary policy decisions.

 

Past experience showed that Shaktikanta Das while maintaining the RBI’s autonomy, helped stabilise the relationship with the government, ensured financial stability (especially during the pandemic shock), and focused on financial inclusion and digital innovation.

 

Irrespective of the RBI Governor, we maintain our view that a high real policy rate and softening growth could create room for the RBI to lower the repo rate by 75 basis points (bps) starting in February 2025, despite weaker FX and received 5-year swaps targeting a move toward 5.80. 

 

Nomura

 

In recent weeks, a stark divide seemed to be emerging between the government and the RBI on the need for countercyclical monetary policy, with both, the Finance Minister and Commerce Minister criticizing the RBI for keeping policy tight on account of high inflation in a few food items and Governor Das instead sticking to his guns in the December 6 policy meeting, and pushing for a continued hold.

 

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.

 

The appointment of the new RBI governor will likely be taken dovishly by the market. 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 bps is likely to quickly become the market expectation (from 60bps presently). There is likely to be some speculation over an intermeeting cut and also a larger than 25bp initial cut.

 

Barclays

 

The monetary policy committee (MPC) will sport an almost new look by the February MPC meeting – with five out of the six members being relatively new. This newness will likely bring uncertainty, but with peak inflation behind us, monetary conditions should be eased to support growth. We still expect the MPC to commence its rate easing cycle from February 2025, following a hold at the recently concluded December meeting.

 

We see a cumulative 100bp of cuts in the easing cycle, taking the policy repo rate to 5.5 per cent by March 2026. Post-February 2025, we expect three more cuts of 25bp each in April, August and February 2026. 

 

Emkay Global

 

The new governor and the MPC will have substantially different policy challenges as well as macro and global landscape while stepping into 2025 versus what the Das-led regime faced at the beginning of 2024. The appointment indicates GoI's comfort in having a bureaucrat rather than a technocrat at the RBI's helm.

 

Policy trade-offs are getting acute with the entrenched state of India's stagflation, tricky timings and small window of conventional rate cuts as global dynamics turn more fluid, mounting FX pressures and increasing cost of FX intervention - none of these were challenging in the same period last year.