The governor and the Goldilocks equation

In his first year in office, Sanjay Malhotra has made structural changes to banking regulation to bring down costs and increase efficiency. Plus, he kicked off a benign interest regime. But there are challenges ahead

- MANOJIT SAHA

During his second monetary policy press meet in April this year, Reserve Bank of India (RBI) governor Sanjay Malhotra observed that while his name is Sanjay, he is not the Sanjaya of Mahabharata to be able to predict the future. “I do not have that divine vision that he had, but we will jointly try to manage the growth and the inflation dynamic in our country,” he said when asked if monetary policy has to do the heavy lifting to support the economy.

What he did not mention was his understanding of macroeconomic conditions and financial sector challenges.

When he took over as the 26th RBI governor on 11 December, data released days before he joined showed growth for July-September quarter (FY2024-25) had plummeted to a seven-quarter low of 5.4 per cent (revised later to 5.6 per cent). Interest rates in the economy had stayed elevated as the policy repo rate had not been cut for close to five years. Bank credit growth was 10.6 per cent year-on-year, down from 20.7 per cent a year ago.

You did not have to be seer to see the challenges that lay ahead.

Malhotra, a career bureaucrat who had graduated in computer science and engineering from the Indian Institute of Technology, Kanpur, and done his Master's in public policy from Princeton, took the bull by the horn. Over the next one year, the monetary policy committee, which the governor chairs, cut the policy repo rate by 125 basis points (bps) — the most recent 25 bps in the first week of December.

The central bank also ensured ample liquidity in the system, which turned into surplus from late March-early April — a factor which was necessary for monetary transmission. The cash reserve ratio requirement of banks was reduced by 100 bps — in four equal tranches — during the June policy when the repo rate was also cut by 50 bps to ensure banks passed on the benefits of lower rates in the economy.