New RBI Governor Shaktikanta Das buys time as worries on autonomy linger

The Reserve Bank of India’s board on Friday bought more time to review the government’s demand for a greater say in the central bank’s functioning, one of the issues that had fostered hostilities between the two sides.

“The board deliberated on the governance framework of the Reserve Bank and it was decided that the matter required further examination,” the central bank said in a statement after the meeting in Mumbai.

The status quo will for now reassure investors about the central bank’s autonomy, as the new Governor Shaktikanta Das was seen as someone more amenable to the government’s requests. Prime Minister Narendra Modi named Das to the post a day after Urjit Patel abruptly resigned as governor after clashing with the government over its demands to ease lending curbs on state-run banks and hand over more of the RBI’s capital to the state.

Yielding to the government’s demands may raise questions on the central bank’s autonomy and have a bearing on the credit rating of one of the world’s fastest-growing major economies.

The “meeting failed to shed any new light on Governor Das’s stance on banking regulation and other issues,” said Priyanka Kishore, head of India and South East Asia Economics at Oxford Economics, Singapore. “RBI is clearly trying to let matters cool before making any further decisions on these fronts.”

The 18-member board, which includes monetary policy makers, finance ministry representatives and industrialists, also reviewed matters relating to liquidity and credit delivery to the economy, besides discussing the current economic situation, global and domestic challenges, according to the statement.

Ahead of the meeting, Piyush Goyal, a top minister in Modi’s government, took to Twitter to accuse the central bank of wielding power without accountability and acting unilaterally in dealing with banks burdened by bad loans.

That prompted some to see this as a “frightening” peek into what’s in store for Das as he settles into the new role.

“It’s frightening because it’s very important to show respect for the process,” said Abhijit Banerjee, a professor of economics at Massachusetts Institute of Technology. “Das is going to worry he got chosen because he’s not the best person for the job but because he is someone who the government favored.”

“He will feel he doesn’t have independent authority,” Banerjee said.

Still, some see Das’s appointment as an end to hostilities that came to mark the relations between the RBI and the government in the Patel-era.

Swaminathan Gurumurthy, a Hindu nationalist and journalist appointed by the Modi government as an independent board member in August, backed the new governor’s conciliatory approach to the government. He was referring to Das’s first media briefing on Wednesday when the governor said the government deserves to be consulted.

“I don’t know if the relationship is good or not, but we have to have stakeholders consultation,” said Das, who was Modi’s key lieutenant when he unveiled his controversial plan to invalidate 86 percent of the currency notes in late 2016.. “The government is not just a stakeholder but also runs the country, economy and manages major policy decisions.”

The central bank has so far kept a tight leash on liquidity, restricted some weak banks from lending and refused to bailout the shadow banking sector. The latter had been at the forefront of new lending in the past three years, which in turn fueled domestic consumption and economic growth.

Modi is keen to keep growth going ahead of a national election early next year and as recent data showed the economy’s expansion may be under threat. Gross domestic product growth in the three months to September slowed to 7.1 percent from the 8.2 percent pace seen in the previous quarter.

The new governor has said supporting growth is very much part of the RBI’s mandate, a sharp contrast from his predecessor who stuck to the central bank’s inflation-targeting mandate. Das’s comments had stoked a rally in sovereign bonds, which extended gains for a third day Thursday on speculation the RBI will shift to a neutral policy stance from the current hawkish bias. They dropped Friday after crude prices regained some ground.

“With Das at the helm, we now think the RBI will call a halt to the tightening cycle,” Shilan Shah and Mark Williams, economists at Capital Economics, wrote in a note. “We no longer expect a rate increase at the next meeting in February.”