Mumbai: The RBI under former governor Shaktikanta Das resisted pressures to cut interest rates through 2024 as it kept its ‘Arjuna’s eye’ trained on inflation, but the central bank under a new detail-oriented head will soon have to take a call if it can continue sacrificing growth.
Das, a career bureaucrat who in 2016 oversaw Prime Minister Narendra Modi’s highly disruptive demonetisation move, left a lasting legacy as he demitted office towards the end of 2024 after expertly navigating monetary policy for six years, the highlight of which was steering India’s recovery through the pandemic.
Sanjay Malhotra, another civil servant, was named as Das’ successor barely 24-hour before the latter’s second three-year term came to an end.
The Reserve Bank of India (RBI) under Das kept interest rates unchanged for almost two years even when economic growth slipped to a seven-quarter low in July-September quarter of the current fiscal.
With the new governor at helm, and a growing dissent within the rate-setting panel in favour of a rate cut, all eyes are now at the next review of the RBI’s monetary policy in February, and specifically the decision on rates.
After his appointment earlier this month, some analysts opined that Malhotra’s arrival cements the possibility of a February rate cut, but some events, especially the US Fed’s shift to make the rate cuts more shallow and its fallout on rupee, are leading many to question if the time is ripe.
Some watchers also question if a shallow rate cut of 0.50 per cent — as widely expected given the inflation projections — will be of any use for economic activity, beyond the optics.
Das, who had joined the central bank after a long career as a bureaucrat where he played a key role in executing Narendra Modi government’s demonetization as well, has said that he acted as per the provisions of the statutes which stipulate focusing on inflation while being cognizant of growth.
In October 2024, the six-member Monetary Policy Committee unanimously decided to change the stance of the policy to “neutral” from “withdrawal of accommodation” earlier, but a rate cut continued to be elusive. At his last policy announcement, Das said that the growth-inflation dynamic has “unsettled”, referring to the below expectations of 5.4 per cent GDP expansion and price rise shooting beyond 6 per cent threshold in October.
In central banking, there is no scope for a “knee-jerk” reaction, Das said at his last press conference after the publishing of the official GDP growth data, and also added that the “credibility” of the flexible inflation targeting framework will have to be protected going forward.
The RBI has kept the key rates unchanged for the 11th consecutive bi-monthly policy reviews.
Prior to the announcement of the monetary policy, Union ministers, including Finance Minister Nirmala Sitharaman and Commerce Minister Piyush Goyal, had expressed their disappointment at keeping the rates elevated, and publicly pitched for a rate cut by RBI.
For much of the latter half of 2024, the RBI continued to expect growth to come at 7.2 per cent in FY25, and held on to the higher number even in the face of some concerns being expressed by the analyst community. Finally, the central bank reviewed it down to 6.6 per cent in the first week of December.
As per some watchers, the RBI’s regulatory and supervisory restricting lending in certain segments like credit cards and personal loans were also to be blamed for the growth slowdown, as discretionary spends undertaken on borrowed money got impacted.
Das earned both admiration and flak for the strict actions on regulated entities like Kotak Mahindra Bank, some entities of Edelweiss Group, Bajaj Finance etc. which also included business restrictions being used more frequently. The governor was also feted with multiple awards including central banker of the year at global fora.
Having joined RBI after a tumultuous turn of events in central bank’s history, which had seen the government invoking a rarely used provision to undermine the autonomy of the RBI which was followed with his predecessor Urjit Patel opting to resign ahead of the end of his term, Das successfully mended the relations and ensured that monetary and fiscal policies act in sync.
Das’ Deputy in charge of monetary policy Michael Patra sought to attribute the growth slowdown to inflation, explaining that a lack of private investments is the primary reason for slower growth, companies are not investing because they are uncertain on demand, and the demand is hit because of high inflation.
Courtesy a framework on transferring surplus, the RBI paid a Rs 2.1 lakh crore dividend to the government in 2024, which has tremendously helped the finances and ensured that deficit targets are met while undertaking social sector spends.
The RBI stance opposing cryptocurrency on financial stability concerns is possibly the rare instance of the central bank speaking out against the government’s moves or wishes during Das’ 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 called the central bank digital currency as the currency of the future as well.
The year also saw further gains on the fight against non-performing assets (NPAs), but watchers are expecting some uptick in the ratios as part of a cyclical upsurge, once lending goes up.
However, credit growth actually declined due to multiple reasons like the lack of sufficient deposit accretion and also the RBI’s regulatory measures.
Through the year, the central bank has been busy with liquidity measures, operating both to decrease and increase the availability of funds, and “normalised” the cash reserve ratio by cutting the quantum of deposits parked with RBI by 0.50 per cent in December to release over Rs 1.1 lakh crore into the system.
Another aspect which the RBI has been very busy with has been volatilities in the currency market. The year was a mixed one, wherein the focus shifted swiftly from how to manage additional flows, which will come in through India’s bond index inclusion, to measures to contain volatilities in the face of FPIs’ selling in India through moves like increasing the caps on interest that can be paid to diaspora’s foreign currency deposits.
These interventions by the RBI have had an impact on the country’s forex reserves, which hit an all-time high of USD 704.885 billion in September and declined sharply to USD 654.857 billion in early-December. The rupee has tumbled to an all-time lows and breached the Rs 85 per dollar level on December 19, presenting another formidable challenge before Malhotra.
Within weeks of Das’ departure, Patra is also set to demit office, and there will be a new replacement. Three external members of the MPC have joined in October 2024 as part of routine rotation, which makes five of the six members of the panel sitting for their first meeting, or being relatively new when the next meeting convenes in February.
Malhotra, who started his three-year term on December 11, has pointed to growth, stability and trust as his focus areas, and also exhorted staffers to put their best foot forward to achieve the goal of Viksit Bharat or developed India by 2047 declared by Modi.
“I exhort you to strive for perfection in performing our critical roles, as we enter Amrit Kaal and support in the realization of our vision of a Viksit Bharat,” Malhotra has told the RBI staffers.
By Ashish Agashe
PTI
