Shaktikanta Das: An unconventional central banker

Shaktikanta Das took charge as the 25th Governor of the Reserve Bank of India (RBI) on December 12, 2018, under exceptional circumstances. His predecessor resigned amid a raging debate over governance issues in the RBI, dividend transfer policy, and the autonomy of the central bank. The line of communication with the government was completely broken.

One of the immediate challenges of the bureaucrat-turned-central banker was to bridge the trust deficit and open a line of communication not only with the government but also with all the stakeholders.

In the interaction with journalists immediately after taking charge, Das made it clear that he will have a consultative approach. In fact, the hallmark of the two years of his term at the RBI was listening to everyone and carrying everyone along.

The remarkable success of Das is evident from the fact – that issues that made newspaper headlines before he joined like central bank autonomy, governance etc, completely vanished from public discourse. The trust deficit was bridged.

Unconventional steps

The government came under criticism from several quarters for appointing a non-economist as a central bank governor. Das – a career bureaucrat – proved the critics wrong as he never shied away from carrying out unconventional measures. Early in tenure as a governor, in March 2019, RBI introduced a $5 billion dollar swap window to infuse durable liquidity in the system. The response to the scheme was huge, as market participants offered more than three times the notified amount, which encouraged the central bank to repeat the scheme.

A series of innovative measures to address liquidity, bond yields were introduced during Das’ two-year tenure. From operation twist – simultaneous purchase and sell of government bonds to soften long-term yields and improve monetary transmission – to Targeted Long Term Repo Operations (TLTRO) to enhance liquidity, particularly in the corporate bond market in the wake of Covid-19 pandemic, underlines the governor’s penchant for unconventional measures to address critical issues.

The banking regulator also adopted a different approach under Das to address the crisis in two banks – Yes Bank and Lakshmi Vilas Bank. In case of the latter, for the first time an Indian bank was allowed to merge with a foreign lender – DBS India Ltd – the Indian subsidiary of Singapore’s DBS Bank.

And instead of merging Yes Bank with another lender, RBI opted for a bank-led rescue scheme in which several lenders picked up a stake, government-owned State Bank of India taking a lead by picking up 49%. HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, etc also chipped in picking up a stake. This was in contrast with earlier rescue plans of asking a particular bank to absorb a failing one – like the way Oriental Bank of Commerce was asked to swallow Global Trust Bank. Another unconventional initiative was to invite private sector participants for resolution of Punjab and Maharashtra Cooperative Bank and taking the decision to allow the lender to convert into a small finance bank.

Continues to surprise

Despite being known as a ‘dovish’ central banker, Das’ ability to surprise markets continuously has not gone unnoticed by central bank watchers. Das saw the economic slowdown early and started to reduce interest rates from February 2019. The central bank was prompt in addressing economic stress once the nationwide lockdown was announced in March to curb the spread of the pandemic as it responded with a 115 bps rate cut between March and May. Despite inflation staying above the monetary policy committee’s tolerance band of 6% for seven months, RBI has made it clear on its priority once again – which is to revive economic growth – in the December policy. The guidance of the October monetary policy review was extremely dovish, as the central bank assured its accommodative stance ‘at least’ in the current financial year and into the next financial year, to revive growth on a durable basis and to mitigate the impact of the pandemic on the economy.

Despite this extreme dovish guidance, he still had something to surprise the markets in December. Markets reacted positively to his assurance on liquidity measures with the BSE Sensex hitting 45,000 mark for the first time immediately after the governor ended his opening remarks while announcing the policy decision on December 4.

As he enters the third year of his three-year tenure (the term can be extended by the government), all eyes will be on if he allows business barons to open banks. An internal working group of RBI has recommended granting banking licence to industrial houses which invited sharp reactions from different quarters with former RBI governor Raghuram Rajan and deputy governor Viral Acharya terming the move as a ‘bad idea’. Das, however, tried to distance himself from the recommendations of the report as he said, “…let me say very clearly that it is a report by an internal working group of RBI. It should not be seen as RBI’s point of view or decision. That has to be very clearly understood.”

Das’s decision on opening up the banking sector to corporate houses could define his first term as the governor of the Reserve Bank of India.

(The writer is a Mumbai-based senior journalist)