Shaktikanta Das’ Year At RBI: A Time Of Juggling Challenges

It’s not uncommon for Reserve Bank of India governors to find themselves with little time to ‘settle in’.

D. Subbarao had the fallout of global financial crisis to tackle within days of taking over. Raghuram Rajan took over at a time of high inflation and a plummeting currency. Urjit Patel was thrown in the middle of demonetisation within months of being appointed.

Shaktikanta Das’ first year hasn’t been any less challenging.

Parachuted into the RBI after his predecessor Patel quit amid tensions with the government, Das had a balance to strike. He needed to repair relations with New Delhi, while ensuring that he isn’t seen as subverting the interests of the central bank. That, while juggling a weak economy and a financial sector with many-a-crack emerging.

The Balancing Act

When Patel resigned abruptly as governor, there were a few thorny issues between the RBI and the government. Prime among them was a suggestion that the central bank was sitting on excess reserves.

In less than a month of taking over, Das, in consultation with the government, set up a committee of experts to deal with the issue. Chaired by former governor Bimal Jalan and assisted by former deputy governor Rakesh Mohan—both considered experts on central bank balance sheet—the committee was given adequate heft to ensure their eventual suggestions would not be questioned.

The committee recommended that realised equity on the central bank’s balance sheet could be between 5.5-6.5 percent. The RBI board, led by Das, accepted the proposals immediately but chose to keep realised equity at the lower-end of 5.5 percent. The result was a transfer of Rs 52,637 crore to the government over and above the year’s surplus transfer.

In a conversation with BloombergQuint in August, soon after the decision was made, Rakesh Mohan said the judgement of whether to keep realised equity at the upper bound or lower bound had been left to the RBI. “The central board has to look at the expectation of risk materialising or not materialising, looking at the market situation in the country and abroad.”

Alongside, there were two other points of contention—the prompt corrective action imposed on a number of public sector banks and the ‘Feb. 12 circular’ which mandated insolvency if a resolution plan is not finalised within 180 days.

Das chose to ease some of the PCA restrictions prematurely but with the caveat that the government has assured adequate capital support to the banks. This support did come through as recapitalisation was front-loaded. The Feb. 12 circular was held ‘ultra vires’ by the Supreme Court, giving the regulator the opportunity to take a middle path under the new circular issued in June.

A Weakening Economy

It’s not like Das could sit back once these contentious issues were resolved.

He took over at a time when domestic growth had only just begun to moderate. Headline inflation was low due to deflation in food prices but core inflation was high and sticky.

At the December 2018 monetary policy review, just before Das came to the RBI, the committee had voted to keep rates unchanged. Come February, with core inflation high, economists still believed that rates could be left unchanged. The committee, however, voted 4-2 in favor of a 25 basis point cut in interest rates. Das, who voted for a rate cut, said that the committee’s mandate is to target headline inflation and it would follow that.

Since then, the MPC has cut rates five times by a total of a 135 basis points. In retrospect, the committee’s decision to front-load rate cuts proved to be appropriate as growth in the Indian economy continued to progressively weaken.

“The Indian economy slowed down dramatically and inflation rates were very subdued, which provided sufficient justification for the aggressive cutting cycle that the RBI has adopted,” said Hugo Erken, head of international economics at Rabobank. “So, I think there is not much opposition against the monetary policy actions that the MPC (and Shaktikanta Das as chair) took,” Erken said.

Thrown in the middle of the rate-paring cycle was a 35 basis point cut, after Das questioned the wisdom of sticking only to multiples of 25 in deciding the quantum of rate changes. Erken didn’t see much merit in moving away from the tried-and-tested.

But just when the market has bucketed Das as a ‘dove’, he threw them a surprise.

At the December 2019 MPC meet, the committee voted to keep interest rates unchanged, even though just days before the meet India reported GDP growth of 4.5 percent—the lowest since 2013. The committee, including Das, voted for a status quo and said it would watch the rising inflation scenario, look for more information in the budget and pick the ‘timing’ of the next rate cut in a way that its most effective.

The market has attached a ‘when in doubt, this MPC will be dovish’ expectation, but that has now been challenged, said Ananth Narayan, associate professor at SP Jain Institute of Management and Research. Erken added that while one could debate the decision, it might, in the medium term, bolster the credibility of the RBI and Das in particular. “It shows that when push comes to shove the MPC is willing act according to its inflation mandate within the flexible inflation target,” Erken added.

One area where Das has been cautious, perhaps too cautious, is in his commentary regarding the government’s fiscal position. Concerns over the stated fiscal position and off-balancesheet borrowings by government entities have dogged the market for the last one year.

Das has tip-toed around some of these issues in public, but that doesn’t mean he hasn’t engaged with the government on these issues, said Rajaraman.

Plugging The Financial Sector Holes

Equally challenging has been the supervision issues that have cropped up in various parts of the Indian financial sector.

Improving asset quality of scheduled commercial banks has been a work-in-progress for the RBI under the last three governors. Resolution remains slow and a weak economy has meant that new points of stress continue to emerge. Das has yielded to calls for forbearance for small businesses but bankers say this doesn’t mean he has eased up on the asset quality clean-up.

In asset quality issues, I don't think there has been any leniency by the governor, said a senior private sector banker, who spoke on condition of anonymity.

Das did, however, yield to bankers in delaying the implementation of a loan pricing regime linked to an external benchmark. By the time guidelines were finally issued, the rate cutting cycle was coming to a close, leaving interest rate transmission incomplete.

There are certainly considerations for real issues faced by banks in their daily business, but that does not mean that we have it easy, said the banker quoted above, adding that Das’ style of regulation allows lenders to present their case better.

The RBI’s management of the crisis that erupted among non-bank lenders has also been criticised for not being decisive enough. After the failure of Infrastructure Leasing and Financial Services Ltd. last year, the problem has lingered. Last month, the RBI was forced to refer Dewan Housing and Finance Corporation Ltd. for insolvency under a newly introduced provision of the insolvency code.

Many have called for a public asset quality review to clear the air. Das has resisted but assured that the regulator is fully on top of the situation. Not only are we fully aware of the vulnerabilities, we are constantly in touch with the managements on what needs to be done, Das said at a press conference on Dec. 5.

As Das and the RBI worked to plug one hole, others emerged.

A large multi-state cooperative bank, Punjab and Maharashtra Cooperative Bank failed after having loaned more than 70 percent of its book to one industrial house linked to the real estate sector. The RBI was forced to impose deposit restrictions, which remain in place. A final resolution is still awaited.

Each of these instances have revealed a weakness in the RBI’s supervision function, one which Das hopes to fix via a supervisory cadre. That will likely not be enough and more will need to be done.