What’s in store for new RBI Governor Sanjay Malhotra

This report is from this week’s CNBC’s “Inside India” newsletter which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Like what you see? You can subscribe here.

Just over twelve months ago, thousands of Indians gathered at Delhi’s Red Fort as Prime Minister Narendra Modi delivered his speech on the momentous occasion of India’s 75th Republic Day.

His message was crisp: Viksit Bharat 2047 — a promise to make India a developed nation by 2047.

The idea of a “developed India” is not new. In fact, it has been repeatedly floated over the 10 years that Prime Minister Modi has been in office.

The plan looked to be on track in January: India’s growth was outpacing other major economies, its stock market had overtaken Hong Kong’s to become the fourth largest in the world and dozens of tech unicorns were on the cusp of going public.

Twelve months on, investors and economists are concerned about high inflation levels, declining household spending, slow job creation and insufficient private investment. The miss in India’s latest gross domestic product (GDP) figure for the second quarter clearly didn’t help.

The government’s latest move to replace Reserve Bank of India (RBI) Governor Shaktikanta Das with Sanjay Malhotra appears to be a calculated, yet subtle, way to address the weakness in India’s economy.

Malhotra previously served as revenue secretary in the Ministry of Finance. His appointment caught some by surprise as the expectation was for Das’ term to be extended.

Still, Malhotra’s leadership is expected to bring a “new direction for the RBI,” Shilan Shah, deputy chief EM economist at Capital Economics noted. This includes rate cuts as early as February 2025, analysts including Shah say.

India’s benchmark interest rate stands at 6.5% — the same level it was at when Das took charge of the RBI in late 2018.

In its November State of the Economy monthly report, the RBI wrote that high inflation is “biting into urban consumption demand and corporate earnings and capex [capital expenditure]” and will “undermine the prospects” for economic growth “if allowed to run unchecked.”

The central bank has since lowered its projection for GDP growth for fiscal year 2025 ending in March to 6.6% from 7.2% in its recent monetary policy meeting.

The incoming governor said little on India’s growth-versus-inflation debate in his first public address. However, he underscored the key role that stability, trust and growth hold in guiding the central bank’s decisions.

“On day one it may not be appropriate to start with bouncers, googlies and yorkers,” the 26th RBI governor said in a live press conference on Wednesday. (For the uninitiated, those are cricketing terms alluding to bowling in a non-traditional fashion.)

“Ours is still an economy that needs to develop as we enter ‘Amrit Kaal’ and to realize the vision of Viksit Bharat by 2047. The huge responsibility we have in ensuring that the growth this country has continues,” Malhotra added. Amrit Kaal is a phrase that roughly translates to “age of elixir.”

As investors ponder how Malhotra will execute his role in 2025, CNBC’s Inside India asked three market watchers what they expect and the decisions they would implement if they were in the governor’s chair.

Economist Shumita Deveshwar describes the RBI’s current situation as a “tricky spot.”

For one, the central bank is grappling with a “potential spillover impact of stubbornly high food prices on broader inflation, but no direct control through monetary policy,” the chief India economist at TS Lombard said.

Another growing worry is India’s “weaker than expected growth momentum,” she added.

To Deveshwar, the “middle ground” for the RBI now is to cut its cash reserve ratio (CRR) to increase liquidity and balance India’s growth-inflation challenge. The CRR is the minimum fraction of total deposits commercial banks have to keep as reserves in either cash or deposits with the central bank. The RBI reduced its CRR by 50 basis points to 4.5% in its recent policy meeting, in hopes of boosting liquidity, credit flows and economic growth.

Meanwhile, Deveshwar says it’s critical for the central bank to start cutting rates by February to boost India’s growth with lower financing costs, which in turn spur higher investments and borrowing by consumers and corporates.

In a one-two punch, Vivek Subramanayam, the founder and CEO of investment bank and asset manager Technology Holdings, says he would adopt a “gradual and calibrated lowering of rates” as governor.

“There’s potential for a few cuts yielding up to a 200 basis points cut in total, but I would make it calibrated and gradual so as to also not rock the boat on both the inflation and currency depreciation front,” Subramanayam explained.

“Keeping inflation and depreciation under control would be more important than maximizing the growth rate,” he added.

Looking ahead to 2025, he reckons that India’s economy is merely “turning around a bend and will gradually re-accelerate with a loosening of monetary and fiscal policy and greater investments in growth.” 

Elsewhere, Malcolm Dorson from Global X ETFs echoes Subramanayam’s optimism on India.

“Broadly speaking, India is still a compounding machine, and we see the recent pullback as a unique opportunity to step in with conviction,” the senior portfolio manager noted.

For now, he anticipates that the RBI will only begin to cut rates when “they deem inflation is under control.”

“The central bank just cut the CRR rate to improve liquidity and has essentially signaled that rate cuts are coming. As investors, we’re not looking for meaningful change,” Dorson, who manages the Global X Active India ETF, explained. Global X’s parent, Mirae Asset, is one of the largest foreign asset managers in India.

Regardless of how Malholtra leads the charge at India’s central bank, the senior portfolio manager says the South Asian powerhouse “looks as attractive as ever.”

He highlighted China’s underwhelming stimulus measures and additional headwinds from U.S. President-elect Donald Trump serving as “a tailwind to the India story.”

Calling the recent GDP statistic a “one-off” drop, Dorson expects India’s average growth rate to be 6% per annum over the next five years. For this, he sees a “meaningful pick-up” in government spending over the next six months.

“Even if the government doesn’t meet the budget, this will allow officials to point towards ‘fiscal consolidation’ which the market should like as well. It feels like a ‘win-win’ [for India’s economy],” Dorson added.

India’s inflation slows from 14-year high. The country’s headline inflation came in at 5.48% in November, slowing from the 6.21% high logged in November. The latest number is also lower than the 5.53% expected by economists polled by Reuters and comes as the RBI held rates at 6.5% during its monetary policy meeting last week.

Indian outbound travel expected to soar in the next decade. Indian travelers spent $34.2 billion on outbound travel in 2023, according to the World Travel & Tourism Council. However, lan Watts, Hilton’s Asia-Pacific president, considers the current level “miniscule” compared to what’s to come. “The story for India is before us,” he said, adding that “India outbound will be the story of the next decade.”

Indian stocks have inched lower this week. The Nifty 50 index has fallen by 0.5% so far this week to 24,548.7 points. The index has risen 13% this year.

The benchmark 10-year Indian government bond yield has remained flat at 6.73% mark compared to last week.

On CNBC TV this week, Kunal Vora from BNP Paribas said domestic investors are absorbing a lot of volatility caused by the news flow over the last week. Vora added that the stock market was showing a “high level of resilience” despite their cautious stance on investing in Indian stocks right now.

Meanwhile, Ramiz Chelat of Switzerland-based Vontobel Asset Management said the slowdown in India’s economic growth will be “largely temporary” as the central government is likely to increase spending on infrastructure such as road and rail.

December 13: India wholesale prices inflation, U.K. GDP

December 16: Eurozone, U.K., India PMIs

December 17: U.K. unemployment

December 18: U.K. inflation, U.S. interest rate

December 19: U.K. interest rate, Japan interest rate, Sweden interest rate