One year of Guv Shaktikanta Das at RBI: Keep calm and do what's needed

RBI and the government had differences on many occasions, but the governor didn't let it play them out in public

When Shaktikanta Das, former economic affairs secretary with the government of India, was  appointed Reserve Bank of India (RBI) governor on December 11, 2018, within just a day of the resignation of Urjit Patel, there were murmurs that the fiercely independent central bank would be converted into a finance ministry department.

A year since then, the murmurs have become much fainter as RBI watchers and insiders say the career bureaucrat, much like his illustrious predecessors, has turned out to be quite a man of his own. “When you enter the RBI, you could be a government man. 

Six months into the job, RBI grows on you and you cannot help but become the RBI governor,” said a senior central bank official requesting anonymity. Das is far from being a rockstar economist. In fact, he is not an economist by training, except for his association at the finance ministry. But RBI observers say he has demonstrated natural instincts, which so far have provided the most accurate solution to pressing issues at hand. And those have been aplenty in just a year as the economic growth tumbles to 2012-13 lows, capacity utilisation shrinks, and bank credit growth comes down to a trickle.  

Among RBI staffers, Das is known as a gentle, soft spoken, balanced person who is always accessible by his junior colleagues. Das doesn’t mind walking into the RBI canteen, obliging staffers with requests for selfies, greets the staff with folded hands in events, and wins over their confidence by settling long standing pension issues in a fuss-free manner. At the same time, he takes efforts in assuring his colleagues that far from apprehensions, the RBI is in safe hands and not the hunting ground of the finance ministry in Delhi. 

“Governor Das has shown measured pragmatism on many issues, whether monetary policy, credit facilitation, banking regulation or capital account liberalisation, while facilitating effective coordination with the government on policy issues,” said Saugata Bhattacharya, chief economist of Axis Bank.

Growth has always remained a key agenda under Das. In his first press conference, he pledged that he would be consultative as far as possible, uphold RBI autonomy, but “government is not just a stakeholder but also runs the country, economy and manages major policy decisions. So, there has to be discussion between the government and RBI.”

Even as inflation targeting is RBI’s mandate, the RBI Act also mentions about growth. Therefore, “maintenance of growth trajectory of Indian economy is also important,” Das had said. 

And so, the MPC departed from its intellectual high ground of keeping rates elevated even when inflation fell to 1.5 per cent, and since February, cut rates five times to 135 basis points under Das. 

Soon after Das became governor, RBI infused over Rs 3 trillion of liquidity in the banking system through secondary market bond purchases. Even as he brought out six banks from the restrictive prompt corrective action (PCA) framework, sensing damage to the credit scene, Das did not show mercy on bank management continuing with bad debt underreporting. The RBI continues to fine almost all banks, frequently, for not adhering to banking guidelines.

He oversaw effective transmission after causing money market rates to come down by 137 basis points, which should result in a pass through in lending rates once banks fully move their portfolio to market base benchmarks, setting of which is another achievement of the RBI under Das. Das doesn’t believe in friction with the government played out in public. Whenever he has been asked about RBI’s stance on issues that seemed at odds with the doings of the government, his standard response has been, “whatever we had to say on the issue, we have communicated to the government.” Unlike his predecessor, he takes as many questions as can be fielded by the media, but he sticks to his script.

April 13, 2019: IMF

“India’s average growth rate of 7.5% over the last few years is certainly very good. But India needs to grow at 7.5%-plus. In fact, India needs to grow at about 8% to eliminate the problem of poverty”

“The existing state of financial safety nets, regional or multilateral, falls grossly short of providing the necessary buffers against such turbulence. Moreover, access to swaps from systemically important central banks is not available to the EMs (emerging markets). For many EMs, high fluctuations in currency movements have pronounced macroeconomic consequences”

Dec 12, 2018: first press meet as RBI guv

“I wouldn’t go into the issues between RBI and government but every institution has to maintain its autonomy and also adhere to accountability”

“I will uphold the autonomy, integrity and credibility of RBI as an institution. I will ensure that it is intact”

Dec 5, 2019: MPC review

“The government and the reserve Bank of India will continue to work together to achieve the national objective of reviving growth. It is not one individual authority’s problem”

Sadly, that also means that the RBI’s monetary policy is devoid of any sentence about the fiscal profligacy of the government, something that had become a regular feature in the policy statement. Analyst say it is almost as if Das and RBI believe in what the government says about its fiscal conditions, and the sharp revision in growth and inflation projections, is almost a post-facto realisation reading the current trend. 

But in December, the RBI did something entirely unexpected. It paused, and preferred to lob the ball to the government’s court in addressing the slowdown. Perhaps, it is a delayed realisation that the central bank has to keep its powder dry if things go wrong, the chances of which are substantial. 

“Mr Das revived the consultative process. Unfortunately, he is serving the RBI at a time, when monetary policy cannot be effective beyond a point,” said Rupa Rege Nitsure, chief economist of L&T Finance Group. 

“Governor Das did not take any hasty decisions. He handled the NBFC crisis, and even the cooperative bank crisis in a very harmonious manner,” said Madan Sabnavis, chief economist of CARE Ratings.

One outcome of that consultative approach is how Das completely remoulded the one day default circular issued by RBI under Patel. With the revised June 7 circular on framework for stressed assets, banks have lot more flexibility, and an incentive, to resolve bad debts as efficiently and practically as possible. 

TIMELINE

Dec 11, 2018: Named 25th RBI governor, assumes office the next day

Jan 2019: Guidelines on ECB, rupee-denominated bonds relaxed 

Feb: First of the five rate cuts in 2019. Policy stance changed to neutral

Taskforce on offshore rupee markets set up

MAR: Foreign exchange swaps introduced as a policy tool

Jun: Rate cut, stance changed to accommodative

Revised framework for resolution of stressed assets by the banks issued, one-day default done away with 

Electronic trading platform for retail rupee trading introduced

Jul: Housing finance regulations move from NHB to RBI

Sep: PMC Bank crisis erupts, RBI freezes withdrawal

Nov: RBI takes over DHFL board

Dec: MPC under Das keeps rates unchanged for the first time since February

It is not to say that Das and his deputies don’t air their opinion on important matters in public. So, despite huge pressure from the government and the market at large, deputy governor N S Vishwanathan, did not relent on bailing out NBFCs, M K Jain headed a committee on agriculture credit where he chastised governments – both at the centre and the states. Das on his part called for urgent public sector bank board reforms, and improvement in corporate governance standards in both banks and non-banks. 

The government had confidence in Das-led RBI that housing finance companies should be regulated by the central bank and not the ineffective National Housing Bank. The RBI also assumed full control over non-bank regulations under Das. 

But was it all smooth sailing with the government? No, on the contrary, differences has been great many, say sources. The transfer of RBI’s surplus funds to the government and the sovereign bond issuance were both contentious issues. In each of them, the RBI pulled a punch above its weight under Das, which he did with ample tact, or with a gentle persuasive manner. 

“The RBI is a great institution, has a long and rich legacy. I will uphold the autonomy, integrity and credibility of RBI as an institution. I will ensure that it is intact,” Das told journalists in his first press conference after becoming the governor on December 11. Observers say, he seems to have kept his word.