India's interest rates could be cut in February following the surprise selection of Reserve Bank of India (RBI) governor.

India has appointed a new central bank governor to replace longtime central bank chief Shaktikanta Das, in a surprise move that some market watchers say reinforces expectations of interest rate cuts early next year.

The new Reserve Bank of India Governor, Sanjay Malhotra, is currently the Revenue Secretary in the Finance Ministry, and will have to deftly balance the need to prevent one of the world's fastest-growing major economies from faltering while at the same time controlling high inflation.

Malhotra, a graduate of the Indian Institute of Technology and Princeton University, recently raised concerns about the health of the economy. Analysts say Malhotra's surprise appointment could lead to a shift towards a more pessimistic monetary policy in an economy expected to become the world's third largest before the end of the decade.

On the other hand, Das is widely considered the most hawkish member of the Reserve Bank of India's monetary policy committee, so his departure may impact the overall stance of the MPC, Shilan Shah, deputy chief emerging markets economist at Capital Economics, said in a note on Monday.

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

Economists at Capital Economics now expect a 25 basis point cut in India's repo rate at Malhotra's first Monetary Policy Committee meeting in February, if not at an unscheduled meeting earlier. The group had previously expected a rate cut in April under Das's leadership.

Economists at Citi, who were already anticipating a rate cut from the Reserve Bank of India in February, reiterated this view. Markets also appear to share their expectations regarding a more flexible monetary policy.

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

Das will leave his position as a member of the Reserve Bank of India (RBI). Longest serving rulers Since India's independence from Britain in 1947.

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

However, the economic backdrop has become more difficult recently. The Indian economy has grown at its rate Slower pace in seven quarters in the three months to September, while inflation exceeded the central bank's 6% tolerance band for the first time in more than a year in October.

Weakness in the economy has prompted calls to cut interest rates, including from senior government officials.

According to local media reports, in November, the Federal Minister of Trade and Industry Piyush Goyal He urged the Reserve Bank of India to lower interest rates To boost growth, while Finance Minister Nirmala Sitharaman also called for it More affordable interest rates To support local industries.

At its December meeting, RThe Monetary Policy Committee voted by a margin of 4:2 Keeping the repo interest rate unchanged at 6.50%.

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

However, the Finance Ministry has a less positive view of growth than the Reserve Bank of India, which could influence new Governor Malhotra's thinking as he heads into his first monetary policy meeting, according to Dheeraj Nim, India currency market strategist and economist at ANZ.

Indeed, ANZ had expected the RBI to implement a total of three interest rate cuts from February 2025, with inflation, excluding food, weak enough to continue rate cuts to support growth.

“The appointment of the next governor has heightened expectations that this will happen,” Niem said.

CNBC's Roksandra Iordas and Annick Pao contributed to this report.