This report is excerpted from this week's CNBC "Inside India" newsletter, which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its rise. Like what you see? You can subscribe here.
The Big Story
Twelve months ago, thousands of Indians gathered at the Red Fort in Delhi as Prime Minister Narendra Modi delivered his speech on the momentous occasion of India's 75th Republic Day.
His message was clear: Vikas Bharat 2047 - a promise to make India a developed nation by 2047.
The idea of a "developed India" is not new. In fact, it has been floated repeatedly during Prime Minister Modi's 10-year tenure.
In January, the plan seemed to be on track: India's growth was outpacing other major economies, its stock market had overtaken Hong Kong to become the world's fourth-largest, and dozens of tech unicorns were on the verge of going public.
Twelve months on, investors and economists are still concerned about high inflation levels, falling household spending, sluggish job creation and insufficient private investment. India’s latest gross domestic product (GDP) figures for the second quarter clearly did not help.
The government’s recent decision to replace Reserve Bank of India (RBI) Governor Shaktikanta Das with Sanjay Malhotra appears to be a calculated, yet subtle, way to address weakness in India’s economy.
Malhotra had previously served as revenue secretary in the finance ministry. His appointment surprised some as Das’ tenure was expected to be extended.
Nevertheless, Malhotra’s leadership is expected to bring “a new direction for the RBI,” noted Shilan Shah, deputy chief EM economist at Capital Economics. Analysts, including Shah, say this includes a rate cut by February 2025.
India’s benchmark interest rate is 6.5% – the same level it was at when Das took over the RBI in late 2018.
In its monthly State of the Economy report for November, the RBI wrote that high inflation is “impacting urban consumption demand and corporate earnings and capital expenditure [capital spending]” and “if left unchecked, it will “weaken the prospects” for economic growth.”
The central bank has since lowered its GDP growth forecast for the fiscal year ending in March to 6.6% from 7.2% in its latest monetary policy meeting.
The incoming governor said little on India’s growth-versus-inflation debate in his first public address. However, he stressed the key role of stability, confidence and growth in guiding the central bank’s decisions.
“It may not be right to start with bouncers, googlies and yorkers on the first day,” the 26th RBI governor said in a live press conference on Wednesday. (For the uninitiated, these are cricket terms that refer to bowling in a non-traditional way. (They are.)
“Our economy is still an economy that needs to enter ‘Amrit Kaal’ by 2047 and realise the vision of Vikas Bharat. We have a big responsibility to ensure that this country continues to grow,” Malhotra added. Amrit Kaal is a phrase that roughly translates to “Amrit Yug.”
As investors ponder what role Malhotra will play in 2025, CNBC’s Inside India asked three market watchers what they would expect and what decisions they would implement if they were in the governor’s chair.
‘Difficult place’
Economist Shumita Deveshwar describes the RBI’s current situation as a “difficult place”.
For one, the central bank is grappling with the possibility that “high food prices are having a negative impact on inflation, but not directly controlling it through monetary policy”, said TS Lombard’s chief India economist.
Another growing concern is India’s “weaker-than-expected growth momentum”, he added.
For Deveshwar, the “middle ground” for the RBI now is to reduce its cash reserve ratio (CRR) to increase liquidity and balance India’s growth-inflation challenge. The CRR is the minimum portion of total deposits that commercial banks are required to hold as reserves in cash or deposits with the central bank. The RBI cut its CRR by 50 basis points to 4.5% in its latest policy meeting, to boost liquidity, credit flow and economic growth.
Meanwhile, Deveshwar says it is crucial for the central bank to start cutting rates by February to boost India’s growth and reduce financial costs, thereby boosting investment and borrowing by consumers and corporates.
‘Taking a turn’
In a one-two punch, Vivek Subramanian, founder and CEO of investment bank and asset manager Technology Holdings, says he will adopt a “gradual and calibrated reduction in rates” as governor.
“There is a possibility of some reduction on both the inflation and currency depreciation fronts, but I will make it calibrated and gradual so that there is no problem on both the inflation and currency depreciation fronts,” Subramanian explained.
“Controlling inflation and depreciation will be more important than maximising growth,” he added.
Looking ahead to 2025, he believes India’s economy has only “turned a corner and will gradually gain momentum with easing monetary and fiscal policy and more investment in growth.”
‘Still a compound growth machine’
Elsewhere, Malcolm Dorson of Global X ETF echoed Subramanian’s optimism on India.
“By and large, India is still a compound growth machine, and we see the recent pullback as a unique opportunity to move forward with confidence,” the senior portfolio manager noted.
For now, he expects the RBI to start cutting rates only when “they believe inflation is under control.”
“The central bank has only cut the CRR rate to improve liquidity and has basically signaled that a rate cut is coming. As investors, we are not looking for a meaningful change,” explains Dorson, who manages the Global X Active India ETF. Global X’s parent, Mir Asset, is one of the largest foreign asset managers in India.
Regardless of how Malholtra leads the charge at India’s central bank, the senior portfolio manager says the South Asian powerhouse “looks as attractive as ever.”
He highlighted China’s weak stimulus measures and additional headwinds from the US. President-elect Donald Trump is acting as “an important step for the India story.”
Calling the latest GDP figures a “one-off” decline, Dorson expects India’s average growth rate to remain at 6% per annum over the next five years. To that end, he sees a “meaningful increase” in government spending in the next six months.
“Even if the government does not complete the budget, this will allow officials to point to ‘fiscal consolidation’ that will also appeal to the market. It looks like a ‘win-win’ for the Indian economy,” Dorson added.
Need to know
India’s inflation is slowing from a 14-year high. The country’s core inflation came in at 5.48% in November, down from a high of 6.21% recorded in November. The latest figure is lower than the 5.53% expected by economists polled by Reuters and comes after the RBI kept the rate at 6.5% during its monetary policy meeting last week.
Indian outbound travel is expected to increase over the next decade. According to the World Travel and Tourism Council, Indian tourists spent $34.2 billion on overseas trips in 2023. However, Hilton Asia-Pacific president Len Watts considers the current levels to be “small” compared to the levels to come. “The story of India is before us,” he said. “India’s exit will be the story of the next decade,” he added.
What happened in the markets?
Indian stock markets have hit a low this week. The Nifty 50 index
is down 0.5% so far this week to 24,548.7 points. The index has gained 13% this year.
The benchmark 10-year Indian government bond yield was flat at 6.73% compared to last week.
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Malhotra had previously served as revenue secretary in the finance ministry. His appointment surprised some as Das’ tenure was expected to be extended.
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