Rate Cut Dismantles Last of India Ex-Central Bank Chief's Legacy
(Bloomberg) -- The Reserve Bank of India’s interest rate cut on Thursday wasn’t only a reversal of hikes under its previous Governor Urjit Patel. It also marked the unwinding of almost all of what he had put in place during his 27-month stint.
In the four months since Patel quit abruptly in December, his policies from interest rate hikes to rules on loan defaults have been overturned.
New Governor Shaktikanta Das delivered a second consecutive rate cut in the same week that a top court in India struck down tough bankruptcy rules adopted under Patel. Under that RBI directive issued on Feb. 12, 2018, the central bank mandated a timeline for recasting bad loans or moving them to bankruptcy court, a move challenged by power generation companies, shipyards and sugar mills.
Patel, who wanted to clean up a banking system saddled with the worst non-performing loan ratios among the world’s major economies, had repeatedly clashed with the government about relaxing lending rules for some weak state-run banks. Das, a former bureaucrat who was named central bank chief a day after Patel quit, eased those curbs in recent months to support credit and economic growth.
Das has taken a more conciliatory approach to policy making than his predecessor, meeting with bankers to hear their concerns about liquidity constraints in the economy, and pledging to consult with all stakeholders, including the government.
“Unsurprisingly, the RBI has stepped up its efforts to stimulate the credit growth of public sector banks under Governor Das, an ex-civil servant,” said Priyanka Kishore, head of India and Southeast Asia economics at Oxford Economics Ltd. in Singapore. “Pushing back full resolution of stressed bank balance sheets is only likely to prolong India’s investment malaise.”
Das has also allowed lenders to restructure loans to small and medium-sized businesses that are in default and appointed a panel to consider a government request to transfer more of the central bank’s excess capital to the state. That would help the government plug a widening budget deficit, allowing Prime Minister Narendra Modi to fund programs aimed at rural workers, a key voting bloc.
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