December 22nd 2024.
The Reserve Bank of India, under the leadership of former governor Shaktikanta Das, faced pressure to cut interest rates throughout 2024. However, Das remained vigilant on inflation and refused to sacrifice economic growth. Now, with a new head at the helm, the central bank will have to make a decision on whether to continue prioritizing inflation or to prioritize growth.
Das, a career bureaucrat, is known for overseeing Prime Minister Narendra Modi's controversial demonetization move in 2016. He left a lasting legacy as he stepped down from his position at the end of 2024 after successfully navigating the country's monetary policy for six years. One of his notable achievements was steering the country's economic recovery through the pandemic.
His successor, Sanjay Malhotra, also a civil servant, was appointed just 24 hours before Das's term ended. The RBI, under Das's leadership, maintained unchanged interest rates for almost two years, even as economic growth declined to a seven-quarter low in the current fiscal year.
Now, with a new governor in charge and a growing dissent within the rate-setting panel in favor of a rate cut, all eyes are on the next review of the RBI's monetary policy in February. The decision on interest rates will be a key focus.
Following his appointment, some analysts speculated that Malhotra's arrival could lead to a rate cut in February. However, there are concerns about the timing of a rate cut, given the US Federal Reserve's recent shift towards more shallow rate cuts and its impact on the rupee.
There are also doubts about the effectiveness of a shallow rate cut, which is widely expected to be 0.50 percent, on economic activity beyond its optics. Das, who transitioned from a long career as a bureaucrat, has stated that he acted in accordance with the statutes, which prioritize inflation while also considering growth.
In October 2024, the Monetary Policy Committee unanimously changed the policy stance to "neutral" from "withdrawal of accommodation." However, a rate cut continued to be elusive. At his last policy announcement, Das acknowledged that the growth-inflation balance was "unsettled," with GDP expansion falling below expectations at 5.4 percent and inflation rising beyond 6 percent in October.
Das emphasized that there is no room for a "knee-jerk" reaction in central banking. He also stressed the importance of protecting the credibility of the flexible inflation targeting framework going forward.
The RBI has maintained its key rates unchanged for 11 consecutive bi-monthly policy reviews. Before the announcement of the monetary policy, top government officials, including Finance Minister Nirmala Sitharaman and Commerce Minister Piyush Goyal, expressed disappointment with the elevated rates and publicly advocated for a rate cut by the RBI.
Throughout the latter half of 2024, the RBI remained optimistic about growth projections of 7.2 percent for FY25, despite concerns expressed by analysts. In the first week of December, the central bank revised this down to 6.6 percent.
Some experts attribute the growth slowdown to the RBI's regulatory and supervisory restrictions on lending in certain segments, such as credit cards and personal loans. Discretionary spending, which is often undertaken on borrowed money, has been impacted as a result.
Das has been both praised and criticized for his strict actions on regulated entities such as Kotak Mahindra Bank, Edelweiss Group, and Bajaj Finance, which have included frequent business restrictions. He has also received multiple awards, including Central Banker of the Year at global forums.
Das joined the RBI during a tumultuous period in its history, with the government invoking a rarely used provision to undermine the bank's autonomy and his predecessor Urjit Patel resigning before the end of his term. Das successfully repaired the relationship between the RBI and the government and ensured that monetary and fiscal policies worked together.
At his last press conference, Das's Deputy in charge of monetary policy, Michael Patra, attributed the growth slowdown to inflation. He explained that the lack of private investments is the primary reason for slower growth, as companies are uncertain about demand, which is also affected by high inflation.
Thanks to a framework for transferring surplus, the RBI paid a dividend of Rs 2.1 lakh crore to the government in 2024. This has greatly helped the country's finances and ensured that deficit targets are met while also allowing for social sector spending.
The RBI's stance against cryptocurrency on financial stability concerns is possibly the only instance where the central bank has spoken out against the government's moves or wishes during Das's tenure. Experts expect more clarity on this issue in 2025.
Das has stated that the new year will also see further progress on the e-rupee and has called the central bank digital currency the currency of the future.
The year also saw progress in the fight against non-performing assets, but some analysts expect an increase in the ratios as part of a cyclical upsurge once lending increases. However, credit growth actually declined due to multiple reasons, including the lack of sufficient deposits and the RBI's regulatory measures.
Throughout the year, the central bank has been busy with liquidity measures, working to both decrease and increase the availability of funds. In December, the RBI "normalized" the cash reserve ratio by cutting the amount of deposits held with the RBI by 0.50 percent, releasing over Rs 1.1 lakh crore into the system.
The RBI has also been preoccupied with volatilities in the currency market. The focus shifted quickly from how to manage additional flows, which would come in through India's bond index inclusion, to measures to contain volatilities in the face of foreign portfolio investors selling in India through moves like increasing the caps on interest that can be paid to diaspora's foreign currency deposits.
These interventions have had an impact on the country's foreign exchange reserves, which hit an all-time high of USD 704.885 billion in September before declining sharply to USD 654.857 billion in early December. The rupee has also reached an all-time low, breaching the Rs 85 per dollar mark on December 19, presenting another formidable challenge for Malhotra.
Within weeks of Das's departure, Patra is also set to step down, and a new replacement will be appointed. Three external members of the MPC joined in October 2024 as part of the routine rotation, making five of the six members relatively new when the next meeting convenes in February.
Malhotra, who began his three-year term on December 11, has identified growth, stability, and trust as his focus areas. He has also encouraged RBI staff to put their best foot forward in achieving the goal of "Viksit Bharat" or developed India by 2047, as declared by Modi. He stated, "I urge you to strive for perfection in performing our critical roles as we enter Amrit Kaal and support the realization of our vision of a Viksit Bharat."
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