RBI governor selection hints at potential rate cut in February, according to economists.

• At a time of economic turmoil, with slowing growth, high inflation, and a declining rupee, Sanjay Malhotra will become the new governor of the Reserve Bank of India.
• Some experts believe that his appointment may signal a shift towards a more dovish monetary policy, thereby increasing the likelihood of rate cuts early next year.

A new central bank governor has been appointed by India to replace Shaktikanta Das, which some market watchers believe enhances the prospects of rate cuts in early next year.

The new Reserve Bank of India governor, Sanjay Malhotra, currently serves as Revenue Secretary in the Ministry of Finance and must skillfully manage the task of preventing one of the world's fastest growing major economies from slowing down while keeping inflation under control.

Malhotra, a graduate from both the Indian Institute of Technology and Princeton University, has expressed concerns about the economy's health. Experts predict that Malhotra's appointment could lead to a shift in monetary policy, potentially resulting in a more dovish approach in an economy that is projected to become the world's third-largest by the end of the decade.

On the other hand, Das is widely considered the most hawkish member of the RBI's Monetary Policy Committee, and his departure could influence the MPC's overall stance, said Shilan Shah, deputy chief EM economist at Capital Economics in a note on Monday.

"Mr Malhotra's appointment could set a new direction for the RBI," said Shah.

Capital Economics' economists now anticipate a 25-basis-point reduction in India's repo rate at Malhotra's first MPC meeting in February, potentially occurring before April under Das' leadership.

Citi economists predicted an interest rate cut from the RBI in February and reiterated their view. Markets also expect a looser monetary policy.

On Tuesday, India's 10-year bond yields decreased by 2 basis points to 6.699%, indicating market anticipation of a rate cut. Meanwhile, the rupee was close to its all-time low of 84.83 against the dollar, according to LSEG data.

Changing of the guard

Since India gained independence from Britain in 1947, Das has been one of the RBI's longest-serving governors.

He steered India's financial sector through recovery, normalized the RBI's relationship with the government, and led the economy through the Covid-19 pandemic during his term.

Recently, India's economy has faced a more challenging economic backdrop. In the three months through September, the country's GDP growth slowed to its seven-quarter low, while inflation surpassed the Reserve Bank of India's 6% target range in October.

Government officials, including senior ones, have called for lower interest rates due to the economy's weakness.

In November, both Commerce and Industry Minister Piyush Goyal and Finance Minister Nirmala Sitharaman urged the RBI to lower interest rates to stimulate growth and support local industries.

The MPC voted 4:2 to keep the policy repo rate at 6.50% in its December meeting.

The central bank has lowered India's GDP growth forecast for fiscal year 2025 from 7.2% to 6.6% in October, but Reserve Bank of India Governor Shaktikanta Das believes that the slowdown in the domestic economy has "bottomed out" in the September quarter.

The RBI has a more optimistic outlook on growth than the Ministry of Finance, which could affect incoming governor Malhotra's perspective during his first monetary policy meeting, according to Dhiraj Nim, India FX Strategist and Economist at ANZ.

The ANZ forecasted that the RBI would make three rate cuts starting in February 2025, as inflation, excluding food, was weak enough to support growth.

Nim stated that the appointment of the new governor has increased anticipation that it will occur.

— CNBC's Ruxandra Iordache and Anniek Bao contributed to this report.