Economy
The Cloth Is Cut Out For RBI’s New Chief Sanjay Malhotra. Can He Deliver In The Slippery Slope Indian Economy?
The Centre’s appointment of Revenue Secretary Sanjay Malhotra as the 26th Governor of the Reserve Bank of India (RBI) ushers in a new era for Mint Street. Malhotra, a seasoned Indian Administrative Service (IAS) officer of the 1990 batch from the Rajasthan cadre, takes over from Shaktikanta Das, whose six-year tenure ends on December 10, 2024. Malhotra’s tenure begins amidst a cocktail of challenges that demand dexterous policymaking.
A Stellar Academic and Professional Journey
Armed with a computer science engineering degree from IIT Kanpur and a Master’s in Public Policy from Princeton University, Malhotra’s educational credentials align seamlessly with the analytical rigor required for steering India’s monetary policy. His 33-year career spans diverse sectors, including finance, taxation, power, IT, and mines, reflecting his versatile expertise.
His prior stints as Secretary of the Department of Financial Services (DFS) and his current role as Revenue Secretary showcases his deep involvement in shaping fiscal policies and navigating India’s tax structure. These roles, coupled with his reputation as a data-driven decision-maker, position him uniquely to tackle the multifaceted challenges of managing monetary policy.
Challenges Awaiting the New Governor
Malhotra inherits a precarious economic situation. Inflation has persistently overshot the RBI’s median target of 4% for nearly five years, eroding purchasing power and confidence. Simultaneously, India’s GDP growth has slowed significantly in the second quarter of FY2024-25, outlining the need for immediate and effective interventions.
Bond markets and forex traders have already signaled their expectations with a fall in bond yields and a weakened rupee following his appointment. Analysts now forecast an interest rate cut during Malhotra’s first Monetary Policy Committee (MPC) meeting in February 2025.
Coordination Over Conflict
Malhotra’s appointment reflects a continued government preference for appointing seasoned bureaucrats to helm the central bank. His predecessor, Shaktikanta Das, had six years of a harmonious RBI-Finance Ministry relationship, enabling cohesive fiscal and monetary policy measures.
in contrast the era preceding Das was marked by tension, with governors like Raghuram Rajan and Urjit Patel frequently clashing with the government. Malhotra’s proven ability to balance assertiveness with diplomacy—evidenced by his pragmatic decision-making on issues like online gaming taxation and cryptocurrency regulation—bodes well for maintaining institutional harmony.
A Vision for the Future
Malhotra is not new to bold decisions. During his tenure at the Finance Ministry, he spearheaded India’s Financial Action Task Force (FATF) evaluation, strengthening the nation’s global anti-money laundering credentials. His push to bring cryptocurrencies under regulatory oversight while working on tax reforms demonstrates a forward-looking approach.
However, he will need to strike a delicate balance at the RBI. While interest rate cuts might stimulate growth, they could further stoke inflationary pressures. Additionally, addressing structural banking sector issues, improving liquidity, and maintaining a stable rupee will require deft maneuvering.
Known for his penchant for detail and data, Malhotra’s “mathematical mind” is expected to bring innovative predictive modeling and revenue forecasting techniques to the central bank. His reputation as a hard taskmaster, coupled with a pragmatic yet non-interfering leadership style, suggests a strong focus on results without overreach.
Has His Cloth Cut Out For Him. Challenges for the New RBI Governor
Sanjay Malhotra steps into the role of RBI Governor with a daunting set of challenges, some carried over from his predecessor Shaktikanta Das and others emerging from evolving global and domestic economic scenarios. With the Indian economy at a crossroads, Malhotra’s tenure will likely shape the way for monetary policy going forward.
Key Areas of Focus and Challenges
1. Flexible Inflation Targeting (FIT): To Revise or Retain?
The impending review of India’s Flexible Inflation Targeting (FIT) framework in 2025 will be critical. FIT has successfully anchored inflation expectations, but question is , Should the inflation target (currently 4%, with a +/- 2% band) be adjusted to accommodate the realities of a fast-growing economy?.
Rising trade protectionism, geopolitical risks, and climate-induced supply shocks may warrant revisiting the acceptable inflation threshold. The debate must balance the sacrifice ratio (growth lost to control inflation) with the goal of supporting sustainable growth.
2. Communication of Policy
The RBI’s policy communication will need to evolve over the next few years. As monetary policies increasingly rely on clear and effective communication, this becomes an essential tool for managing market expectations.
Aligning communication with the updated FIT framework will reduce the need for frequent or large policy interventions, ensuring stability.
3. External Sector Management
Managing rupee-dollar parity will be a steep challenge. Post-U.S. elections, the INR has been under severe pressure as the USD strengthens. Balancing currency stability with inflation and growth objectives will require a mix of conventional and unconventional tools.
Volatility in the global economic environment, akin to the “taper tantrum,” demands innovative approaches to stabilize the rupee without excessive depletion of forex reserves.
4. Fiscal Policy Synergy
The government’s medium-term fiscal consolidation strategy offers an opportunity for the RBI to act independently of fiscal dominance.
With less interference from fiscal policy, the central bank can focus on domestic and external economic conditions without the burden of accommodating excessive government borrowing.
5. Monetary Policy Transmission
Improving the transmission of monetary policy to the productive sectors of the economy remains critical. Developing external benchmarks for pricing loans and tradeable bonds will enhance the effectiveness of monetary tools. Exploring whether these benchmarks can be extended to NBFCs could bring much-needed liquidity and efficiency to credit markets.
6. Core Banking Challenges
The banking sector faces many challenges –
—Expected Loss-Based Provisioning: Transitioning to this framework will require strategic guidance and enforcement.
—Fraud Detection and Ethical AI: Enhancing systems to detect fraud while embedding ethical AI in decision-making processes is paramount.
—Cybersecurity: As digital penetration deepens, the RBI must strengthen cybersecurity frameworks. A coordinated platform for banks to combat threats and share intelligence is overdue.
7. Trade Barriers and Supply Disruptions
Rising trade barriers and supply-chain disruptions will increasingly influence domestic price formation. Geopolitical risks and climate change are driving these disruptions, adding volatility to markets. Malhotra must ensure that monetary policy adapts to these external shocks without derailing domestic stability.
8. Financial Stability and Prudential Regulation
Strengthening the capital levels and quality in the banking system will be a continual priority. As volatility grows, the RBI must reinforce prudential regulations to ensure financial stability. Encouraging banks to build resilience against “unknown unknowns” will be vital in preventing systemic risks.
Combating the Unknown Unknowns
Sanjay Malhotra’s background as a technocrat and public policy expert positions him well to address these challenges. However, his success will hinge on many things –
—Integrating climate risks into the central bank’s broader strategy.
—Embracing unconventional tools to manage volatility in currency and capital markets.
—Balancing innovation with caution, especially in areas like digital currencies and AI in banking.
The Last Bit
As Malhotra prepares to take the reins at the RBI, the economy is at a crossroads, and his decisions in the coming months will shape India’s growth trajectory. With inflation pressures, slowing growth, and an ever-evolving global economic headwinds, his tenure promises to be one of both challenge and opportunity.
