Will New RBI Governor Sanjay Malhotra Navigate India’s Stagflation? Economists Weigh In | EXCLUSIVE

With the appointment of Sanjay Malhotra as the 26th Governor of the Reserve Bank of India (RBI), discussions have intensified about the challenges awaiting him. Shaktikanta Das, demitting office today after six transformative years at the helm, leaves behind a significant legacy. During his tenure, Das navigated some of the most turbulent phases of the Indian economy, including maintaining the policy rate unchanged for 11 consecutive Monetary Policy Committee (MPC) meetings over two years to tame soaring inflation within the RBI’s tolerance band.

Das is widely regarded as one of the most hawkish governors in recent history, steadfast in his commitment to curbing inflation. His firm stance was evident across 11 MPC meetings, where he consistently upheld the status quo on policy rates. With Malhotra stepping in as the new RBI Governor, many expect a shift from hawkishness to a more dovish tone. "In the upcoming MPCs, the tone and tenor are likely to be dovish—not as hawkish as Das," remarked Suman Chaudhary, Chief Economist at Acuité Ratings, in a statement to Republic Business.

Known for his consensus-driven approach and clear communication style, Malhotra is set to preside over his first monetary policy meeting in February. The February MPC is expected to feature a refreshed composition, with Malhotra as Governor and a new Deputy Governor, as the term of current Deputy Governor Michael Patra concludes in January. Additionally, three new external MPC members were appointed in October, adding further dynamism to the committee.

Madhavi Arora, Chief Economist at Emkay Global, highlighted the steep policy challenges facing Malhotra. "The policy trade-offs are becoming more acute. He must navigate India’s entrenched stagflation, the delicate timing of a narrow window for conventional rate cuts amidst shifting global dynamics, and escalating foreign exchange pressures along with the rising costs of FX intervention," Arora explained. 

She added that these challenges were less pronounced in the same period last year. Das’s final MPC meeting underscored the persistent volatility in inflation and growth dynamics since October. "The new RBI Governor will need to strike a careful balance between growth risks and headline CPI inflation, which remains well above the RBI’s medium-term target of 4 per cent," UBS noted in a report. Chaudhary of Acuité Ratings emphasized the dual challenges ahead for Malhotra: managing the growth-inflation equation and ensuring financial stability.

On the potential shift in the MPC's tone, Arora cautioned, “It’s too early to determine the tone definitively; we’ll have to wait and watch.” Economists broadly agree that Malhotra has big shoes to fill. Das, in his farewell briefing, left a poignant message: "May the RBI grow even taller as an institution of trust and credibility. My best wishes to each one of you."