India has appointed a new central bank governor to replace longstanding chief Shaktikanta Das in a surprising move that some market watchers say strengthens the outlook for rate cuts early next year. 

The new Reserve Bank of India governor, Sanjay Malhotra, currently serves as Revenue Secretary in the Ministry of Finance and will have to deftly balance the need to prevent one of the world’s fastest growing major economies from stuttering while keeping a lid on doggedly high inflation.

Malhotra, an alumnus of the elite Indian Institute of Technology and Princeton University, has recently raised concerns over the health of the economy. Analysts say Malhotra’s surprise appointment could initiate a shift toward a more dovish monetary policy in an economy that is expected to become the world’s third-largest before the end of the decade.

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

“The appointment of Mr Malhotra could set a new direction for the RBI,” Shah added. 

Economists at Capital Economics are now expecting a 25-basis-point cut in India's repo rate at Malhotra's first MPC meeting in February, if not in an unscheduled meeting earlier. The group had previously predicted the rate cut would come in April under Das' leadership.

Economists at Citi, who were already predicting an interest rate cut from the RBI in February, reiterated that view. Markets also appear to be sharing their expectations regarding a looser monetary policy.

India's 10-year bond yields were down 2 basis points at 6.699% on Tuesday, signaling market expectations of a rate cut, while the rupee was hovering near record lows at 84.83 against the dollar, according to data from LSEG. 

Das will leave his post as one of the RBI's longest-serving governors since India gained independence from Britain in 1947. 

During his term, he led India's financial sector through a period of recovery, normalized the RBI's relationship with the government and steered the economy through the Covid-19 pandemic.

However, the economic backdrop has become more challenging recently. India's economy grew at its slowest pace in seven quarters in the three months through September, while inflation edged above the central bank's 6% tolerance band for the first time in over a year in October.

The weakness in the economy had spurred calls for lower rates, including from senior government officials.   

As per local media reports,  in November, Union Minister for Commerce and Industry Piyush Goyal urged the RBI to cut rates to boost growth, while Finance Minister Nirmala Sitharaman also called for more affordable interest rates to support local industries. 

In its December meeting, the MPC voted by a margin of 4:2 to keep the policy repo rate unchanged at 6.50%.

While the central bank had revised India's GDP growth outlook for fiscal year 2025 down to 6.6% from 7.2% in October, Das had expressed confidence that a slowdown in the domestic economy had "bottomed out" in the September quarter.

However, the Ministry of Finance has held a less positive view of growth than the RBI, which could influence incoming governor Malhotra's thinking as he heads into his first monetary policy meeting, according to Dhiraj Nim, India FX Strategist and Economist at ANZ. 

Already, the ANZ was predicting that RBI would carry out a total of three rate cuts starting February 2025, with inflation, excluding food, weak enough to pursue rate cuts to support growth. 

"The incoming governor's appointment has only boosted expectations that it will happen," said Nim.  

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