India replaces ‘hawkish’ central banker Shaktikanta Das #IndiaFinance

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India’s government has appointed a new central bank governor, after a sharp decline in economic growth and accelerating inflation dented the outlook for the world’s most populous country.

Shaktikanta Das, the head of the Reserve Bank of India, has been replaced by revenue secretary Sanjay Malhotra, who will start a three-year tenure this week, according to a government notification released on Monday.

Some economists said the departure of the relatively hawkish Das could pave the way for interest rate cuts early next year.

Data published late last month showed India’s GDP growth fell to 5.4 per cent in the three months to September — its slowest in almost two years. Before that, Indian media were reporting that Das was expected to secure an extension to his six-year term.

Das had been praised for his steady hand on the currency and on regulation of India’s financial industry. But ministers had publicly criticised him over the RBI’s resistance to cutting interest rates amid rising inflation, which breached the central bank’s 6 per cent upper target band in October.

As India’s economy showed signs of weakening, finance minister Nirmala Sitharaman last month voiced concern over high borrowing costs. Commerce minister Piyush Goyal had also criticised as “absolutely flawed” the approach of considering rising food prices when setting interest rates.

The government was “clearly trying to pin the blame for slowing economic growth” on the central bank, said Eswar Prasad, professor of economics at Cornell University.

“This is an unfortunate and unwarranted action by the government that diminishes the independence of the RBI and will hamper its effectiveness in meeting its inflation target,” Prasad said. “The credibility of the RBI is particularly important for managing the balancing act of cooling off inflation without damaging growth.”

In an interview last month with the Financial Times, Das said that while India’s economy was showing “a mixed picture”, the central bank’s key focus was on damping inflation.

Shilan Shah, deputy emerging markets economist at Capital Economics, said the announcement was a surprise. The exit of Das, who was considered the “most hawkish member” of the RBI’s monetary policy committee, could mean rates would be eased at Malhotra’s first rate-setting meeting in February, or even at an unscheduled meeting before then.

“The appointment of Mr Malhotra could set a new direction for the RBI. Admittedly, at this very early stage not much is known about his monetary policy views,” Shah said. “But in comments last week, he did voice considerably more concern over the health of the economy than Mr Das did during Friday’s policy announcement.”

Malhotra, a civil servant of more than three decades’ experience, last week urged government tax officers to prioritise the interests of the economy and “not kill the golden goose” with excessive demands.

At Das’s final policy meeting last week the RBI kept its key interest rate unchanged at the same 6.5 per cent level where it has been since early 2023. But the central bank also slashed its GDP forecast for the 2024-25 financial year to 6.6 per cent from 7.2 per cent.

Madhavi Arora, chief economist at Emkay Global Financial Services in Mumbai, pointed out that the RBI would have a “very new MPC” early next year, with deputy governor Michael Patra — seen as Das’s “right hand” — set to depart in January.

“The dynamics have changed. They are very different from what they were a year ago,” Arora said.

With GDP growth slowing, pressures on India’s currency building and inflation rising, “clearly a stagflationary state requires policymakers to be more tactical in their stance than just ease without looking at the consequences”, she added.