The Reserve Bank of India (RBI), under former governor Shaktikanta Das, ignored pressure to cut interest rates in 2024 and kept its main focus on inflation. However, now under a new chief, the central bank will soon have to decide whether it can continue to prioritise inflation at the expense of economic growth. Bureaucrat Das oversaw the entire matter after Prime Minister Narendra Modi’s decision to ban currency in 2016. He has left a lasting legacy.
The economy was revived during the Covid-19 pandemic
Shaktikanta Das efficiently conducted monetary policy for six years. After the completion of Das’s second term at the end of 2024, the government has appointed Revenue Secretary Sanjay Malhotra as the new governor. Das is credited with leading India’s revival from the time of the Kovid-19 pandemic. Another bureaucrat Sanjay Malhotra was appointed Das’ successor later this year. Malhotra was appointed just 24 hours before Das’s second three-year term ends.
Repo rate was kept unchanged, economic growth at seven quarter low
Under Das’ leadership, the RBI kept the key policy rate repo unchanged for almost two years. However, the economic growth rate has come down to a seven-quarter low in the July-September quarter of the current financial year. With the new governor taking charge and growing disagreement in the interest rate setting committee (MPC) in favor of cutting interest rates, all eyes are now on the RBI’s monetary review meeting in February. Everyone is waiting to know what the MPC’s stance is in the February meeting.
The possibility of interest rate cut in February has increased
After the appointment of the new RBI governor, some analysts believed that Malhotra’s arrival had strengthened the possibility of a rate cut in February, but some developments, especially the US Federal Reserve’s indication of a lower rate cut in 2025, have led some to question whether this is the right time for a rate cut. Some observers are also questioning whether a mild rate cut of 0.50 per cent – as is widely expected given inflation projections – would be of any help to economic activity.
Decision to change policy stance to neutral
Das, who joined the central bank after a long career as a bureaucrat, had said that he worked according to the provisions that focus on inflation while being conscious of growth. The six-member Monetary Policy Committee had unanimously decided to change the policy stance to ‘neutral’ in October 2024. In his last policy announcement, Das had said that the growth-inflation dynamics had become unstable, citing economic growth rate of 5.4 percent in the July-September quarter and inflation rising above the satisfactory level of six percent in October.
Shaktikanta Das said in his last press conference after the publication of official GDP growth data that there is no scope for ‘sudden’ reaction in central banking. He said that the ‘credibility’ of the flexible inflation targeting framework has to be protected going forward. The RBI has kept the key rates unchanged for 11 consecutive bi-monthly policy reviews.
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