Economists Retain February Rate Cut Call Amid RBI Change In Guard

Post the appointment of new RBI Governor Sanjay Malhotra, economists continue to expect a rate cut at the next Monetary Policy Committee meet in February.

The government on Monday appointed Sanjay Malhotra, secretary (Revenue) in Ministry of Finance as the next Reserve Bank of India Governor, after outgoing Governor Shaktikanta Das' term ended.

The new governor will face a slowing economy, high inflation and rising calls of a rate cut to boost economic activity. While economic growth fell to a seven-quarter low of 5.4%, retail inflation came in excess of the MPC's target range of 4(+/-2)%. Economic growth is expected to recover in the second half of the fiscal, while food inflation is expected to ease amid winter crop arrivals.

After the appointment of three new external members in October this year, the composition of the MPC is set to change further when it meets in February next year. After the appointment of the new governor, the MPC may also see a new deputy governor with Michael Patra's term set to end in January.

"We still expect the MPC to commence its rate easing cycle from February 2025, following a hold at the recently concluded December meeting," Barclays said.

Outgoing Governor Das continued to cite caution on elevated food inflation in the last MPC, though acknowledged that if the slowdown in growth were to persist, that may require policy support, explained Barclays. "In our view, the worst of quarterly growth readings and peak inflation are now behind us. In Q3 FY25, high frequency indicators of economic activity are showing some signs of rebound in momentum," Aastha Gudwani, chief India economist at Barclays said.

The brokerage expects cumulative cuts of 100 basis points in the easing cycle, taking the policy repo rate to 5.5% by March 2026.

Emkay Lead Economist Madhavi Arora also said that a rate cut can't be ruled out in February 2025, along with unconventional easing measures— specifically the gradual easing of regulatory lending norms ahead, in order to re-spur the waning credit offtake.

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, noted Arora. The policy trade-offs are getting acute, with entrenched state of India's stagflation, tricky timings and small window of conventional rate cuts as global dynamics turn more fluid, and mounting FX pressures and increasing cost of FX intervention, she added.

Along with a likely shift towards more accommodative monetary policy, macroprudential policies could become less pro-cyclical, and more flexibility could be allowed in currency fluctuations, going forward, as compared to the relatively tighter leash seen over the last one year and more, stated a note by Nomura.