Three cheers and three challenges

An open letter to Reserve Bank of India Governor Shaktikanta Das

Dear Governor,

Congratulations.

You are not the first governor to get an extension but on your way to the second term, you have broken quite a few records.

When you complete your second term in December 2024, you will be only the second governor (after Sir Benegal Rama Rau) in the RBI’s 86-year history to be at the helm for at least six years. Incidentally, has any RBI governor got a three-year extension in one shot? An extension coming almost one-and-a-half months ahead of the expiry of the current term is also something that probably hasn’t ever happened in the past.

Three days after the announcement, writing a column on your extension is a predicament akin to that of Larry Fortensky’s, the US construction worker who was the seventh and last husband of Elizabeth Taylor (by her eighth marriage; she married Richard Burton twice). Fortensky knew well what he was expected to do on their honeymoon in 1991 at Michael Jackson's Neverland Ranch but his challenge was how to be different from Taylor's previous husbands!

My challenge is no less. This is why instead of writing my regular Monday column, let me attempt an open letter.
 

No one can dispute the fact that you have had an extremely challenging time. The first year was spent tackling the crisis in the NBFC sector and Yes Bank. Within a fortnight of Yes Bank’s rescue, the Covid pandemic hit the Indian economy. You brought the interest rate to its historic low, flooded the system with money and tackled the once-in-a-century crisis with measures many of which are unconventional. Your own October statement says the RBI has taken at least 100 measures since April 2020.

You were the face of the government during demonetisation. Naturally, when you walked into Mint Road, many felt the government’s grip over the central bank would tighten. A three-year extension reaffirms the government's comfort with you — it covers the entire term of the current National Democratic Alliance at the Centre. But even your severest critics can't say that you have given up the independence of the central bank.

Frankly, you remind me of a trapeze artiste — a master of the finest balancing act who listens to all but takes his own decisions. You transferred record funds from the RBI reserves following the recommendations of Jalan Committee. But the quantum was in no way as much as the government would have loved. Still, that’s how you built bridges with the government, burnt by your predecessor. At the same time, within weeks of taking over the assignment, you won the hearts of the insiders through the updation of the pension scheme — a contentious issue for decades. 

Instead of discussing what you have done, let me outline three challenges before you as you embark on your next three-year term as India’s chief money man.

One: It’s time to unwind. You have been saying that the RBI’s stance will remain accommodative as long as necessary to secure growth but the global trends may not allow you too much space. Through an ultra-loose monetary policy and a historic low interest rate, you have ensured recovery, but if unwinding is delayed, there could be trouble ahead. As is your wont, you have informally started it by mopping up money through the reverse repo auctions at a higher price, but perhaps the reverse repo rate needs to be hiked sooner than later.

Globally, short-term rates are moving up and the markets are pricing in higher interest rates. Central banks of many emerging markets are sounding more hawkish now than they were even a month ago. Things are changing fast with the oil price adding fuel to the fire. Can you afford to ignore the writing on the wall? If you don’t act, you may face the predicament of one of your predecessors, D Subbarao, who was fast in cutting rates but slow in raising them.

In fact, I will not be surprised if in the next three years of your tenure there are only rate hikes. Y V Reddy is probably the only governor who raised rates through his five-year term; didn’t cut them even for once. Your next term may also see a rise and rise of foreign exchange reserves.

Two: Another challenge will be to equip the central bank for digital disruptions in the financial sector. The fintechs are expanding their footprints fast and furious. The rules of the game are changing and many of the banks look vulnerable in the new regime. I am sure you want to encourage the challengers but the RBI needs to acquire the skill and expertise to play the referee in the digital game. Otherwise, the disruptors could even threaten the financial sector's stability.

As an offshoot of digital disruptions and growing disintermediation, the RBI also needs to look at credit growth through a different prism. Banks and traditional NBFCs are not the only lenders in the system any more.

You’d also need to take a call on cryptocurrency. Should they be banned or regulated? Banning is easier than regulating them as crypto is neither part of the payments system nor an asset or commodity. But if they are banned, what will happen to millions of investors? India has over 100 million investors in crypto, the highest in the world. You have articulated your stance but the government is still quiet on this. Delay on taking a call has its costs. I urge you to act on this fast. You have the government’s ear.

It’s also time to have the central bank digital currency or CBDC. Not to substitute the crypto since it is not a substitute. It’s just a wallet but CBDC will create a new narrative and convince us that the RBI is up to the challenges of the digital age.

Three: Finally, you’d need to take a call on corporate entry into banking. Last November, an internal RBI working group recommended significant changes across the banking sector — ranging from a higher promoter stake over a long period of time to the entry of corporate houses into banking and permitting large non-bank lenders to convert to banks.

Since then, you have been busy fighting the pandemic and recession. Meanwhile, the government has announced the privatisation of two public sector banks. Media reports suggest that work on this has started in close coordination with the RBI. All of us are eagerly waiting to see how the scene unfolds.

Financial sector commentators swear by your sartorial sense. They keep a close tab on the colour of the tie you wear while reading the monetary policy statement and try to guess what the announcement will be. One of them even told me that talking about ties is the best way to strike up a conversation with you.

I’m more comfortable talking about your policies and the banking system. The objective of writing this letter is not to tell you what’s to be done. I wouldn’t dare that. I am just flagging up a few issues to a governor who is a great listener. 

Happy Diwali.

Yours sincerely,

Tamal Bandyopadhyay

The writer, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd

His latest book: Pandemonium: The Great Indian Banking Story

To read his previous columns, please log on to www.bankerstrust.in

Twitter: @TamalBandyo