Outgoing Shaktikanta Das, a man of a different disposition, had said in October that the balance between growth and inflation was ‘well-poised’. This month, after an unforeseen dip in growth and consumption, Das said the growth-balance dynamics was ‘unsettled’. Malhotra has the arduous task of restoring the balance: encouraging growth while donning the hard hat of an inflation warrior – a responsibility coded in law.
Steering this transition, constructing an intellectual context to defend it, and convincing bright RBI cadres who share a sense of pride in what they do, would test Malhotra’s mettle and tact. Behind every decision a central bank takes, there is a ‘world view’. A weak consumption, as RBI recently explained, was due to high inflation that eroded purchasing power and dampened investments. The view justifies the reluctance to ease monetary policy.
In the esoteric, sometimes mystical, world of central banking, world view could also emerge from the other end of the tunnel: weak investments hurt job and income growth, squeezing consumption – thus building a case for a softer interest rate to stoke investments. When a central bank projects a view to anchor its actions, the market expects it to stick to it. Malhotra is well-placed to pull off a changeover to a different world view that would set the stage for a rate cut.
It could well be a forerunner to a delicate business. 2025 could also be the year when the mandate of the monetary policy framework is reviewed. The first 5 years (2016-21) of ‘inflation-targeting policy’, which mandates RBI to keep inflation between a tolerance band of 2-6%, raised no murmur. But there have been rumblings since the last few years with inflation, often due to external shocks, sometimes breaching the upper limit.
Towards the end of Das’ second term, a war of words – initially polite and academic, though presumably rooted in politics – boiled over amid signs of slowdown. After the CEA advocated that central banks should focus on ‘core inflation’ – a narrower definition that excludes volatile items like food and energy – senior ministers buttressed the point. Perceived as an overt hint from New Delhi to cut rates, it fuelled chatter about a possible relook at the framework. The turn of events didn’t go down well in Mint Street.If, indeed, a plan for such an exercise is in the works, the new guv would very much be a part of the panel that does the review. In such an eventuality, he can either resist the proposal, or adhere to RBI’s traditional view of targeting ‘headline inflation’ (which includes food, instead of accepting core), or perform the more difficult job of persuading RBI eggheads to deal with new realities.RBI governorship is the last port of call in the bureaucrat’s career. The role defines him for the rest of the person’s life. Malhotra would be remembered for what he does in RBI. Das would be always admired for navigating the rough waters of Covid and Ukraine war without any blowups in the financial sector.
Unlike many central bankers, he was smart enough to pull back the emergency liquidity instead of letting it slosh around. His moves to derisk his constituency by punishing errant finance companies, tightening lending rules and curbing regulatory arbitrage between banks and NBFCs irked many, even impacted consumption in the short run. His curious statement that ‘yield curve is a public good’ or RBI’s heavy interventions in the forex market that baffled everyone (including IMF) may have stemmed from his personal belief of maintaining orderliness as well as to pursue an unstated national objective of making the rupee a currency of choice in international trades.
Das was the first governor who urged the need for greater coordination between GoI and RBI. Perhaps as a quintessential part of India’s steel-frame, he could say no less. As RBI guv, he could do no more.
Just before his retirement, Das had a nasty surprise: the growth number was way below what RBI had forecast. A topper in computer science, Malhotra would know that growth projections spewed out by models can go awry. Unseasonal rains caused by climate change, vagaries of geopolitics and AI shock waves could mean more misses between predictions and actual numbers in future.
Monetary policy has ceased to be a science. It’s an art. In India, it’s probably abstract art. For the governor, treading between complex, often conflicting, compulsions and a longing to preserve his personal image and legacy of the institution, is art of the possible.