Persistently high inflation and slowing growth: New RBI Governor has a balancing act on his hands

The Centre has appointed Revenue Secretary Sanjay Malhotra as the 26th Governor of the Reserve Bank of India as the incumbent Governor Shaktikanta Das’ six-year term comes to an end on December 13. Malhotra, a 1990-batch officer of the Indian Administrative Service of the Rajasthan cadre, will take charge as RBI Governor on December 11, as per an official statement.

This will be just a day before the CPI inflation figure for November is released on December 12 and will be a key data set for Malhotra as he starts his new innings moving from New Delhi’s North Block to Mumbai’s Mint Street. Retail inflation has remained consistently high with prices of food items playing havoc and has often breached the RBI Monetary Policy Committee’s tolerance band of 2% to 6%.

In October, retail inflation came in at a surprising 14-month high of 6.21% with vegetable inflation at a 57-month high of 42.2%. Analysts believe that retail inflation in November is unlikely to have eased significantly and is expect it at 5%.

The persistently high inflation has also kept the MPC from cutting rates despite recent calls from the government to perhaps review the stance. In its most recent policy review between December 4 and 6, the committee instead went for a 50-basis point cut in two tranches in the cash reserve ratio in a bid to ease potential liquidity stress in the system. The RBI also revised upwards its inflation projection for FY25 by 30 bps to 4.8% with Q3 at 5.7% from the earlier 4.8%, and Q4 at 4.5% from the earlier 4.2%.

But with economic growth slowing down this fiscal, as the RBI’s new Governor, Malhotra will also have to perhaps, look at more measures to boost growth. The RBI Governor also chairs the MPC, which is scheduled to hold its next bi-monthly policy meeting between February 5 and 7.

For now, the government and analysts are hopeful that the 5.4% GDP growth in the second quarter of the fiscal was a blip and the economic engines are once again at full speed in the third quarter.  Analysts remain hopeful of a rate cut by the RBI’s MPC in its February meeting.

By then, there is expected to be more clarity on the economy. The ministry of statistics would have released the advance estimates on GDP growth for the current fiscal. Finance minister Nirmala Sitharaman would also have presented the Union Budget 2025-26 giving a clear outline on the government’s policy measures to take forward the economy. In the US, Donald Trump would have been sworn in as the 47th President and have perhaps elaborated more on his plans for potential tariff hikes.

While finding a balance in the growth versus inflation debate has often remained a contentious issue between North Block and Mint Street, outgoing RBI Governor Shaktikanta Das has managed to navigate through this and helmed the central bank and the country’s monetary policy through the critical Covid-19 pandemic. Malhotra will surely draw on his vast and varied experience of 33 years and most recently his term as Revenue Secretary where he has had to deal with tax policy and collections.