When Shaktikanta Das announced that December 10 would be his last day as governor of the Reserve Bank of India (RBI), all eyes turned to his successor, Sanjay Malhotra. Princeton-educated Malhotra, a career civil servant, takes over at a crucial time. With the country’s economic growth slowing, more than one government functionary has beat the drums for the RBI to cut interest rates to spur growth.

Unsurprisingly, the most commonly asked questions when Malhotra’s appointment was announced were how he would approach the job and whether it would mark a shift in the relationship between the Centre and the RBI.

While Malhotra’s appointment has revived discussions about the RBI’s independence, managing this delicate relationship has been a constant theme throughout the history of RBI governance. If anything, Das, Malhotra’s predecessor, was something of an outlier, with these concerns notably muted or even largely absent during Das’ tenure.

Das often played the role of mediator, striving to maintain autonomy while responding to external pressures. Unlike predecessors who faced escalating conflicts—such as Y.V. Reddy and Raghuram Rajan on fiscal deficits or Urjit Patel on demonetisation and reserves—Das chose a collaborative yet assertive approach. He carefully navigated policy disagreements to avoid outright confrontation. This pragmatic strategy allowed him to align with government priorities where feasible while safeguarding the central bank’s core principles. Malhotra will have to walk a similar tightrope.

The realities of the job

Despite Das mastering the art of balancing the political expectations of North Block—the part of the Secretariat which houses the Finance Ministry—and the RBI’s institutional mandate, there were still instances where the two publicly differed in their views. Most recently, this came in the form of two senior union ministers publicly asking Das to cut rates.

Even in his outgoing address, Das’ diplomatic approach was on full display. “The perspectives of the central bank and the Finance Ministry may differ at certain times, but I believe in my tenure, we have been able to settle such things," he remarked. Das added that restoring balance between inflation and economic growth remains an important task for the RBI.

However, while Das’ refusal to buckle in the face of government pressure to cut rates may seem like the reason for his replacement, the fact is that the government has every right by law and legislation to appoint whomever it is comfortable with.

This is an important lesson about regulatory leadership appointments. We often forget that in a democracy, institutions like the RBI get their authority and mandate from the laws made by the Parliament. So, while it is popular to preach the ideology of absolute independence of regulatory institutions, we would do well to remember that despite their operating and policy flexibility, they must still balance political expectations and external pressures.

Das’ legacy

Governor Das, known for his deft handling of monetary policy, inflation, and financial stability, leaves behind a stable economy with healthy reserves and a robust banking system. Yet his tenure had to balance maintaining RBI’s autonomy amid political expectations, managing high real interest rates, and addressing criticisms of overregulation.

The central bank’s tightening of supervisory controls under Das curbed errant practices but led to calls for more nuanced, dynamic regulation tailored to contemporary needs. Over the past decade, the RBI has introduced many categories of licences across the spectrum, including in banking. 

In that light, looking at the developmental aspect of the RBI, one would assume that it would take stock of how its Small Finance Bank (SFB) and Payment Bank licences and whether there is merit in facilitating a path for them towards universal banking. Beyond this, the RBI could also explore whether there’s a need for newer differentiated banking licences like, say, a mortgage bank, etc.

During Shaktikanta Das’s tenure, the RBI implemented stringent prudential guidelines to address systemic weaknesses and eliminate malpractices. While these measures significantly improved regulatory oversight, they have also been criticised for becoming overly restrictive. Many within the banking sector now argue that excessive regulation and micromanagement are stifling operational flexibility and innovation, creating unintended challenges for institutions striving to grow in an increasingly competitive environment. 

It isn’t hard to imagine that the banking lobby likely wanted the government to appoint someone who was more flexible to their needs. Given Malhotra’s prior experience of heading the Department of Financial Services, one anticipates that given the current slowdown in bank credit growth, macroprudential policies are less pro-cyclical. His past role in steering negotiations across multiple stakeholders of the Goods and Services Tax Council, which showcased his ability to maintain and build consensus, would doubtless have counted in his favour when he was considered for the RBI governor role.

Malhotra’s mandate

Governor Malhotra’s leadership style will shape RBI’s trajectory even as the institution’s resilience and deeply institutionalised processes provide continuity. The challenge lies not in reinventing the wheel but in accelerating reforms that enhance agility, inclusivity, and stability. The eyes of the markets and the nation will be on him as he crafts policies that balance growth aspirations with economic prudence.

Malhotra’s arrival signals continuity with an opportunity for renewal. His prior experience in financial services and consensus-building will be pivotal in addressing structural challenges. He inherits a unique dual mandate. On one hand, the banking and financial sectors require lighter, more adaptive regulations to fuel growth. On the other, emerging challenges such as climate finance and fintech innovation demand tighter oversight. The imperative is clear: regulatory agility akin to frequent app upgrades, shifting from a one-size-fits-all approach to frameworks that reflect the evolving market realities.

The challenges before Malhotra are as much structural as they are policy-driven. The RBI must continue balancing inflation control with growth imperatives, a point of contention with the government during Das’ tenure. Moreover, the incoming governor faces demands for regulatory rationalisation, especially as the banking sector begins to push back against perceived micromanagement.

The RBI’s role in managing emerging risks—be it climate finance, fintech regulation, or geopolitical shocks—remains crucial. This requires more than policy tweaks. It would demand cultural and organisational shifts to enable nimbleness and proactive intervention. Collaboration with other regulators to address regulatory arbitrage and foster consistency will also be critical.

India’s climate financing needs are projected at over $10 trillion to achieve its net zero targets. Traditional financing institutions and mechanisms will not permit for such large-scale funding to get into climate financing, which is currently seen as risky. Blended finance, which strategically combines public, private, and philanthropic capital to de-risk investments, is crucial for attracting private-sector funding and making large-scale sustainable projects viable. 

The RBI will need to take a proactive role in spearheading an inter-regulatory framework for climate financing, as the current legal and financial regulations do not permit blended finance, making standalone financing through banks insufficient to meet India’s climate goals. Significant regulatory changes will be necessary for financial regulators and the government to align on enabling blended finance, which combines public and private capital to de-risk investments and bridge the gap for funding green infrastructure and sustainable development.

To optimise its supervisory bandwidth, the RBI must address the issue of non-operational entities holding onto licences in the non-banking financial company (NBFC) sector. Of the nearly 10,000 registered NBFCs, only about a third actively engage in lending, with many others serving as passive entities or operating under the radar. This has led to regulatory concerns, damaging the sector’s credibility. The RBI could address this by closing non-operational entities, a move that would require political support and policy alignment, which the new governor should be well-positioned to achieve.

In his previous roles, Malhotra has steered taxation on online gaming as well as crypto. His understanding of these subjects at a micro-taxation level could probably bring newer ideas to the regulatory system and allow for their mainstreaming, albeit with adequate safeguards. Of course, one should remember that many of the decisions around emerging technologies have to be agreed upon globally amongst other central banks.

The question is whether Malhotra can sustain institutional autonomy while fostering innovative, adaptive solutions for India’s evolving economy. The markets and the nation expect nothing less. After all, as Keynes observed, “The difficulty lies not so much in developing new ideas as in escaping from old ones.” The expectations from the new governor are high, but so is the resilience of the institution he leads.