Emkay said it does not rule out a cut in February 2025, but would be more comfortable taking a firm call closer to the policy window. Sanjay Malhotra's appointment as the Reserve Bank of India (RBI) Governor indicates the government is comfortable on having a bureaucrat rather than a technocrat at the RBI's helm, economists said. This, however, also means that the post of Revenue Secretary has been vacated at a pivotal time, just as discussions for the FY26 Union Budget have begun, wherein the Revenue Secretary plays a major role, they noted.
"The GoI will thus need to fill that position imminently, to ensure minimal disruption to the planning and execution of the Budget," EMkay Global said in a note.
What to expect from Sanjay Malhotra?
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, he has taken tough taxation decisions relating to capital markets, Emkay noted adding that the harmonisation in capital gains tax treatment, with removal of indexation benefit 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 said.
Nomura India said when bureaucrats join the RBI, a greater alignment with the government’s way of thinking is seen in the initial period, but over time this changes with more alignment seen with the RBI’s institutional thinking.
It sees a likely shift towards more accommodative monetary policy. Given Malhotra’s background in the Department of Financial Services, it is possible that amid slowing bank credit growth, macropru policies are less pro-cyclical, Nomura India said.
"The RBI has always sought to build its FX reserves buffer and smooth out volatility - two aspects that may continue under the new management. 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 one year and more," Nomura India said.
MPC appointments
Emkay Global said the Calendar 2025 is going to see a new MPC composition, with three newly appointed external MPC members in October 2024, who will now be joined by the new Governor and possibly a new Deputy Governor in January 2025 -- with Dr Patra's tenure nearing its end.
"Interestingly, the new Governor and MPC will also have substantially different policy challenges as well as macro and global landscape while stepping into 2025 against what the Das-led regime faced at beginning-2024," Emkay said.
The brokerage noted that the policy trade-offs are getting acute: 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. It said none of these were challenging in the same period last year.
Rate cut ahead?
Emkay said it does not rule out a cut in February 2025, but would be more comfortable taking a firm call closer to the policy window.
We also keep a watch on unconventional easing measures, specifically the gradual easing of regulatory lending norms ahead, in order to re-spur the waning credit offtake," it said.
Sanjay Malhotra's background
Malhotra will become the RBI Governor on December 11 for a three-year term. With this, the government has appointed two career bureaucrats as RBI Governor in a row. In his bureaucratic career of 33 years, Malhotra served in sectors spanning power, finance, taxation, IT, and mining.
He is a 1990 batch IAS officer from the Rajasthan cadre, with an engineering degree in computer science from IIT Kanpur, and a Master's in Public Policy from Princeton University.
Prior to his appointment as Revenue Secretary, he was Secretary in the Department of Financial Services (DFS); his other prominent prior roles include CMD of REC, and ex-officio Secretary to the GST Council.