New Governor, New Challenges: Here’s What Brokerages Expect From The Fresh MPC

Brokerages have shared their initial reactions to Sanjay Malhotra's appointment as the 26th Governor of the Reserve Bank of India. They have highlighted his extensive experience and practical approach, while remaining cautious, awaiting clarity on his monetary policy stance in the February Monetary Policy Committee meeting. 

Bank of America highlighted Malhotra's significant contributions, stating, "He brings with him considerable experience in real sectors and regulatory reforms that have wide-ranging macro implications, potentially making his policy perspectives sensitive to both growth and inflation risks." 

Barclays noted his track record of transparency and efficiency, adding that they see him continuing the practical approach that has served the RBI rather well in turbulent times instead of doing anything radical.

Goldman Sachs remarked that Malhotra's expertise in taxation has played a key role in shaping direct and indirect tax policies, a skill set that may influence his monetary stance amidst global uncertainties.

Nomura added another nuanced perspective, citing his Ministry of Finance background. "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," it said.

The brokerage added that Malhotra recently warned tax officials against issuing exorbitant demand notices at the risk of compromising growth, stating that "do not kill the golden goose". This shows that his experience has given him an acute appreciation of government's revenue generation and the importance of growth, Nomura said.

Shift In Monetary Policy Stance Anticipated

As Malhotra takes charge during a period of slowing growth and high inflation volatility, brokerages anticipate a shift in monetary policy toward a more accommodative stance.

Nomura predicts a "likely shift towards more accommodative monetary policy" and expects a rate cut at the February MPC meeting. Barclays shares a similar sentiment.

BoFA also anticipates rate cuts, maintaining its forecast of "100bps of cuts in the cycle, bringing the repo rate to 5.50% by end of 2025." Goldman Sachs forecasts "a shallow easing cycle of 50bps, with 25bps rate cuts in the February and April 2025 MPC meetings."

The composition of the MPC is another focal point for brokerages. With five out of six members set to be relatively new by Feb. 2025, Barclays expects "newness to bring some uncertainty," though it believes "monetary conditions should be eased to support growth."

Nomura sees potential for a larger rate cut initially, stating, "There is some possibility of a bigger 50bps catch-up move upfront, though this will likely be data-driven."

Malhotra steps into his role on Dec. 11 and is currently serving as the Secretary in the Department of Revenue, Ministry of Finance, Government of India. Before joining the Department of Revenue, he held the post of Secretary in Department of Financial Services under the Ministry of Finance, Government of India, which directly liaisons with the RBI on financial regulation.