After another status quo year, all eyes are on a growth-enhancing interest rate cut with a new Guv at the helm

Mumbai, Dec 22 (PTI) The RBI under former governor Shaktikanta Das resisted pressure to cut interest rates through 2024 as it kept its ‘Arjuna eye’ on inflation, but the central bank will be under a new, detail-oriented head will soon have to take action a call if it can continue to sacrifice growth.

Das, a career bureaucrat who oversaw Prime Minister Narendra Modi’s highly disruptive demonetization move in 2016, left a lasting legacy when he left office at the end of 2024 after six years of skillfully setting monetary policy, culminating in steering the Indian recovery over the years. pandemic.

Sanjay Malhotra, another civil servant, was appointed Das’s successor just 24 hours before the latter’s second three-year term ended.

The Reserve Bank of India (RBI) has kept interest rates unchanged for almost two years under Das even as economic growth slumped to a seven-quarter low in the July-September quarter of the current fiscal.

With the new governor at the helm, and a growing disagreement within the interest rate panel in favor of a rate cut, all eyes are now on the RBI’s next monetary policy review in February, and in particular the decision on interest rates.

After his appointment earlier this month, some analysts felt that Malhotra’s arrival strengthens the possibility of a rate cut in February, but some events, especially the US Fed’s shift to make rate cuts more superficial and its impact on the rupee, make many wonder if the time is right.

Some observers also wonder whether a superficial 0.50 percent rate cut – as widely expected given inflation expectations – will be of any help to economic activity, optics aside.

Das, who had joined the central bank after a long career as a bureaucrat, where he also played a key role in implementing the Narendra Modi government’s demonetisation, has said that he acted in accordance with the provisions of the statute that stipulates that the emphasis should be on inflation, while he is aware of growth.

In October 2024, the six-member Monetary Policy Committee unanimously decided to change the policy stance from ‘neutral’ to earlier ‘withdrawal of easing’, but a rate cut remained elusive. At his latest policy announcement, Das said the growth-inflation dynamic has become ‘troubled’, citing lower-than-expected GDP growth of 5.4 per cent and price rise above the 6 per cent threshold in October.

There is no room for a knee-jerk reaction at the central banks, Das said at his last press conference after the release of the official GDP growth data. to be protected in the future.

The RBI has left key interest rates unchanged for the 11th consecutive bi-monthly policy revisions.

Ahead of the monetary policy announcement, Union ministers including Finance Minister Nirmala Sitharaman and Commerce Minister Piyush Goyal had expressed disappointment over keeping interest rates high and publicly pitched for a rate cut by the RBI.

For much of the second half of 2024, the RBI continued to expect FY25 growth to reach 7.2 percent, sticking with this higher figure even despite some concerns raised by the analyst community. Finally, the central bank cut interest rates to 6.6 percent in the first week of December.

According to some observers, the RBI’s regulatory and supervisory measures, which restricted lending in certain segments such as credit cards and personal loans, were also responsible for the slowdown as discretionary spending on borrowed money was affected.

Das has received both admiration and criticism for the strict action taken against regulated entities such as Kotak Mahindra Bank, some entities of Edelweiss Group, Bajaj Finance etc., which also saw increased application of business restrictions. The Governor was also awarded several awards including Central Banker of the Year at global forums.

After joining the RBI following a tumultuous turn of events in the central bank’s history, in which the government had invoked a rarely used provision to undermine the RBI’s autonomy, following which his predecessor Urjit Patel opted to to resign before the end of his term of office. Das successfully restored relations and ensured that monetary and fiscal policies were in sync.

Michael Patra, Das’s deputy in charge of monetary policy, tried to attribute the slowdown to inflation, explaining that a lack of private investment is the main reason for slower growth, that companies are not investing because they are uncertain about the demand, and that demand is affected. due to high inflation.

Thanks to a surplus transfer framework, the RBI paid a ₹2.1 lakh crore dividend to the government by 2024, which has helped the finances immensely and ensured that deficit targets are met while spending in the social sector.

The RBI’s stance against cryptocurrency over financial stability concerns may be the rare instance of the central bank speaking out against the government’s actions or wishes during Das’s entire tenure. Experts expect some clarity on such aspects in 2025.

Das has said that the new year will also see further movement on the e-rupee and also termed the central bank’s digital currency as the currency of the future.

The year also saw further gains in the fight against non-performing assets (NPAs), but observers expect some rise in ratios as part of a cyclical upturn once lending picks up.

However, credit growth actually declined due to several reasons such as lack of sufficient deposit growth and also the regulatory measures taken by the RBI.

Throughout the year, the central bank has been busy with liquidity measures, seeking to both reduce and increase the availability of money, and ‘normalized’ the cash reserve ratio by reducing the number of deposits parked with the RBI by 0.50 percent in December to to release. about ₹1.1 lakh crore in the system.

Another aspect that the RBI has been very busy with is the volatility in the foreign exchange market. The year was a mixed one, with the focus quickly shifting from managing additional flows, which will come through the inclusion of the Indian bond index, to measures to limit volatility in light of FPI sales in India by through measures such as raising the ceilings on Indian government bonds. interest payable on the foreign currency deposits of the diaspora.

These interventions by the RBI have had an impact on the country’s foreign exchange reserves, which reached a record high of $704.885 billion in September and fell sharply to $654.857 billion in early December. The rupee has fallen to an all-time low and has crossed the line ₹85 to the dollar on December 19, posing another formidable challenge for Malhotra.

Within weeks of Das’ departure, Patra will also resign from office and a new replacement will be appointed. Three external members of the MPC joined in October 2024 as part of a routine rotation, leaving five of the panel’s six members either present for their first meeting or relatively new when the next meeting takes place in February.

Malhotra, who started his three-year term on December 11, has listed growth, stability and confidence as his focus areas and also urged the staffers to put their best foot forward to achieve the goal of Viksit Bharat or developed India by 2047 achieve as stated by Modi.

“I urge you to strive for perfection in discharging our crucial roles as we enter and support Amrit Kaal in realizing our vision of a Viksit Bharat,” Malhotra has told the RBI staffers.