Banking Central | The big challenges for RBI’s Shaktikanta Das in 2023

What hurts a central banker the most? In his Jackson Hole speech in August, US Federal Reserve chair Jerome H. Powell put it succinctly: “The burdens of high inflation fall heaviest on those who are least able to bear them… failure to restore price stability would mean far greater pain.”

That summarises the dilemma of central bankers worldwide. It is a predicament for any central banker. The world fears a recession accompanied by rising interest rates and an uncertain geopolitical climate. But then inflation emerges as a much bigger challenge for everyone to ignore. High price levels present a double whammy to economies – it can stifle demand and act as a drag on nascent growth recovery.

In India, too, the scenario isn’t different. For Reserve Bank of India governor Shaktikanta Das and his colleagues in the mighty Monetary Policy Committee, 2022 is a year to forget for two key reasons.

Inflation failure

The central bank and the rate-setting MPC faced their biggest embarrassment in history after failing to contain inflation within the 2-6 percent band for three consecutive quarters. Inflation averaged 6.3 percent in January-March, 7.3 percent in April-June, and 7 percent in July-September.

On November 2, Das told an annual banking conference that the contents of a letter explaining why the inflation target was missed and the report will be under wraps and made available in the public domain at some point.

However, minister of state for finance Pankaj Chaudhary said in Parliament in early December that provisions of the RBI Act, 1934, do not provide for making the report public. While the report is secret, the contents are not. In the letter, the RBI blamed global factors primarily for the inflation failure. But that’s a half-truth.

Acting too late

Going by the preamble of the RBI Act, the central bank’s primary responsibility is “to maintain price stability while keeping in mind the objective of growth.” Thus, failure to keep inflation effectively means the RBI failed in its primary responsibility.

Arguably, the central bank acted too late on inflation. Although Das has used the phrase ‘Arjuna’s eye’ on inflation more than once recently to show the central bank’s newfound combative spirit, the reality is the fight began too late.

As this writer wrote last week, the RBI played the role of the blind king Dhritarashtra on inflation for too long before the master archer ‘Arjuna’ entered the scene and finally got his eyes on the target.

Inflation has stayed above the desired target level from early 2020 and above 6 percent for almost a year. Global factors played a role in the inflation spike but the writing was clearly on the wall. The logic that growth would have taken a hit by early action on inflation is not convincing enough.

Crypto conundrum

No central banker could stay away from questions on crypto in 2022. In fact, it isn’t an exaggeration to say that crypto forced the turn to central bank-sponsored digital currencies globally, perhaps earlier than they thought.

However, the government’s silence on crypto regulations put Das and his colleagues at Mint Road in a spot. On March 4, 2020, a three-judge bench of the Supreme Court quashed the ban that the RBI had imposed on trading in cryptocurrencies in 2018.

Essentially what this meant was that the RBI’s hands were tied even as crypto companies continued to lure gullible investors looking for quick returns with fancy advertisements. Despite being the banking regulator and the guardian of the financial system, the central bank couldn’t act on such companies, although the RBI top brass kept warning investors and the government that far deeper issues are involved in cryptocurrencies.

“Cryptos don’t have any underlying value, not even a tulip,” Das famously said.

What’s in store in 2023? Will the RBI get a hold on high inflation and more clarity on crypto regulations from the government? As the new year approaches, the RBI’s two big challenges will be on these two fronts—inflation management and crypto regulations.

The biggest and the most persistent enemy of the central bank remains high inflation. Over to 2023.

(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)