RBI chief faces long to-do list in new job

The new Reserve Bank of India (RBI) Governor has a list of challenges to face: from fixing a banking crisis to convincing investors of the institution’s autonomy.

Shaktikanta Das, 61, a former economic affairs secretary at the Finance Ministry, took charge at the RBI for a three-year term on December 12, two days after Urjit Patel quit amid worries that the government was encroaching on the central bank’s turf. Das, a career bureaucrat, is seen as someone who can ease tensions with the state, prompting a mixed reaction from markets. Sovereign bonds rallied on optimism he may shift the monetary policy stance to a less hawkish one. The rupee, Asia’s worst-performer among major currencies this year, dropped as much as 0.4% against the dollar, amid concern over the central bank’s independence and recent state election results.

“Das will be initially considered more as a Finance Ministry insider, and only time will tell whether he preserves the RBI’s independence,” said Sonal Varma, an economist at Nomura Plc in Singapore. “Our analysis of his views suggests that he has a neutral-to-dovish bent on monetary policy. We expect regulatory policies under his governorship to be more sympathetic to the government’s arguments.”

Das’s first test comes on Friday when the central bank’s board is due to meet. The government is expected to push for tighter supervision of the RBI, including setting up committees to have oversight of various functions, from foreign exchange management to financial stability. A former economic affairs secretary from 2015 to 2017, Das worked closely with the central bank and oversaw Prime Minister Narendra Modi’s controversial plan to ban high-value notes in November 2016, an exercise that hurt the economy. He is currently a member of the Finance Commission of India and serves as the government’s representative at the Group of 20 summits.

He will also need to win over colleagues at the RBI. Speculation is rife that Viral Acharya, the deputy governor in charge of monetary policy and Patel’s messenger in the public showdown with the government, may step down. It was Acharya who delivered a hard-hitting speech in October warning the government against undermining the central bank’s independence. That caused friction between the authorities and Patel, resulting in his departure on December 10. The government is pushing the RBI to hand over more of its capital to the government and loosen curbs on some of the weakest banks to ensure lending continues ahead of an election next year. “Das’s appointment as the next RBI governor is likely to keep investors and markets worried about RBI’s independence, given his close ties with the government,” said Priyanka Kishore, an economist at Oxford Economics in Singapore. “Further clarity will emerge only once we know the new governor’s stance on the key regulatory and capital management issues that have become the bone of contention between the RBI and the government.”

Goldman Sachs Group Inc. economists said Das’s near-term challenge will be to address tensions between the RBI and government. They don’t expect the appointment will lead to any changes to the RBI’s monetary policy framework.

Das will take charge of the six-member monetary policy committee, which left interest rates unchanged last week after two hikes earlier this year. With inflation undershooting the central bank’s forecasts, there are growing expectations that the RBI will shift to a neutral policy stance from its current tightening bias, which could set the stage for a rate cut.

What our economists say...

“The appointment of Shaktikanta Das as new RBI governor creates an opportunity for a course correction on monetary policy. We expect the central bank to shift away from a hawkish bias that’s increasingly at odds with evidence of weak growth and fading inflation.”-- Abhishek Gupta, Bloomberg Economics said.

Modi initially brought Das into the finance ministry to head the revenue department, later moving him to economic affairs, where he oversaw the demonetisation programme.

The government will look to Das to help provide much-needed liquidity to the banking system. Authorities want the RBI to do more to support crisis-ridden shadow banks, which accounted for at least 3 out of 10 fresh loans in the past few years. The crisis in the sector threatens consumption, the bedrock of Asia’s third-largest economy. The new governor will also have to sort out debt defaults in a banking sector saddled with bad loans and share oversight of state-run banks with the government.

(Disclaimer: This article first appeared on Bloomberg.com/asia, and is published by special arrangement)