Interest rate, growth, currency conundrum awaits Sanjay Malhotra as he takes over RBI

The government on Monday appointed Revenue Secretary Sanjay Malhotra as new governor of the Reserve Bank of India (RBI) for a period of three years, beginning December 11, 2024. Malhotra will take charge on Wednesday. Malhotra, a 1990 batch IAS officer from the Rajasthan cadre, will succeed Shaktikanta Das, who was at the helm of the RBI since December 2018.  

Malhotra takes over the reins of the banking regulator at a time when the Indian economy is facing a double whammy of rising inflation and slowing growth. While inflationary pall has been building over macro firmament of the Indian economy, rate cut din from various quarters has also gathered momentum in the wake of second quarter GDP growth dipping way below expectations to 5.4%.

So, the immediate challenge for Malhotra, going forward, will be balancing growth and inflation.

Next major issue he may have to grapple with is the depreciating rupee against the dollar. Continuing its declining trend, rupee fell 7 paise to 84.73 against the U.S. dollar in early trade today on the back of foreign fund outflows and a tepid domestic equities trend. On December 4, the Indian currency wilted to all time low of 84.76 against the greenback.  

In the recent past, there had been a clamour for rate from the government quarters. Finance minister Nirmala Sitharaman called for a rate cut and commerce minister Piyush Goyal called linking of policy rate decisions to prices of seasonal items as a baseless practice. If inflationary pressure do not not subside soon, the new RBI governor will have to meander through the calls for rate cuts from the government quarters – a path too treacherous for an RBI governor as history has shown.

Challenges may remain high for the new governor as indicated by the previous monetary policy statement on December 6. “High inflation reduces the disposable income in the hands of consumers and dents private consumption, which negatively impacts the real Gross Domestic Product (GDP) growth. The increasing incidence of adverse weather events, heightened geo-political uncertainties and financial market volatility pose upside risks to inflation. The MPC believes that only with durable price stability can strong foundations be secured for high growth. The MPC remains committed to restoring the inflation growth balance in the overall interest of the economy,” said the statement of the outgoing Governor Das.