The appointment of a generalist at the helm of a central bank is not limited to India, but has become a trend across central banks
After all the dust his appointment kicked up, Shaktikanta Das now completes one year at the helm of the central bank. One does not remember a more dramatic appointment like his in recent memory.
The last time an RBI (Reserve Bank of India) Governor was appointed under similar circumstances was in 1957, when Dr B Rama Rau resigned leading to the appointment of Deputy Governor K G Ambegaonkar as the interim Governor, who served for a fortnight before HVR Iyengar came in as a full-time Governor.
Likewise, Das was named after the dramatic resignation of Urjit Patel on December 10, 2018, though there was no interim appointment this time around. Das was appointed Governor two days later, that is December 12 last year.
Compared to Rau, Governor Das had a much tougher entry to the central bank. First, he was not just expected to douse the escalating fire between the government and the central bank, but also ensure the RBI maintains its autonomy -- independence is not the right word in my view.
This was no mean task as during the 1950s, the RBI was seen as an extension of the Finance Ministry and the new Governor was expected to toe the line of the government. By 2018, it was widely expected that central banks should have functional autonomy from the government and the same applied to the RBI as well.
Second, Patel’s exit came against the backdrop of a bitter fight over the government’s keenness on a larger share of RBI reserves which New Delhi deemed as excessive. This issue was far more complicated than the usual issue of high interest rates, a familiar point of conflict between the two.
Third, the RBI was fighting battles of a large banking crisis and a looming slowdown in the economy. There were concerns as to how the new Governor will address these concerns. There were doubts that as a former Finance Secretary, he will takes sides with the government and not continue fighting the battle of cleaning up the Indian banking sector.
In this one year, we have seen action on some but not all these agenda points.
First, one of Das’ first tasks was to appoint a high-level committee to resolve the issue of excessive RBI reserves. Knowing the sensitivity of the issue, RBI former governor Bimal Jalan was appointed the chair of the committee. After a long 8-month wait, the committee submitted its report, which gave a reasonable verdict. It approved transfer of excess reserves worth Rs 52,637 crore, much lower than what was expected by the markets.
More importantly, this was just a one-time transfer and not a continuous one as feared by experts (For details, please see my piece on Jalan Committee).
Second, when it comes to addressing the economic slowdown, RBI’s Monetary Policy Committee cut policy rates by 135 bps between February and October 2019. These rate cuts are mostly attributed to Das, but it is forgotten that interest rate decisions are now taken by the 6-member MPC and not the Governor alone. The Governor has a veto in the case of a tie, but all the rate changes were voted by majority of the MPC. On this front, Das’ contribution is questioning the status quo of changing policy interest rates in multiples of 25 bps. This led the MPC going for an unconventional 35 bps cut in the August policy.
The more important question is that despite the RBI’s cuts, why banks have not lowered their interest rates? In the December policy, the RBI noted that whereas weighted average lending rate (WALR) on fresh rupee loans declined by 44 bps, the WALR on outstanding rupee loans actually increased by 2 bps! The RBI is hopeful that the new external benchmark system and new bank loans will be priced in with lower interest rates leading to better transmission.
Third, Das continued earlier efforts to resolve the banking crisis. The central bank has done away with silo-based regulation where there were different departments for regulating and supervising banks, NBFCs and cooperatives. Instead, it has unified the six departments into one Department of Regulation which will focus on activity-based supervision and not entity based, as was the case earlier. The new department will have a specialised cadre of supervisors for this purpose. At an Ahmedabad University conference, Das added that the RBI will establish a College of Supervisors to train and update supervision officers. In fact, this activity of regulation and supervision could perhaps be Das’ legacy provided if he takes more steps as outlined in my article.
Four, apart from the Jalan Committee, the one year has seen appointment and submission of several other committee reports on diverse topics: Offshore Rupee Markets (Chair: Usha Thorat), Agricultural Credit (MK Jain), Housing Finance Securitisation Market (Harsh Vardhan), Secondary Market for Corporate Loans (TN Manoharan), Digital payments (Nandan Nilekani), Micro, Small and Medium Enterprises (UK Sinha) and Liquidity Management Framework. In particular, the reports on secondary market for corporate loans and housing finance securitisation will help shift India away from a heavy bank-based financial system to a more market-driven one.
To sum up, Governor Das’ one year tenure has been very eventful. He came to the RBI under really trying times and the appointment was questioned over his purported lack of expertise. To be fair, this criticism should apply to the government which made the decision and not that of Das. If the RBI should only be headed by professional economists and finance experts, then there is a need to specify it in the relevant Act, which surprisingly does not mention any qualifications for the RBI Governor!
The appointment of a generalist at the helm of a central bank is not limited to India, but has become a trend across central banks. The rise of nationalism has led to preference for such appointees who can manage relations with the government, which is no easy task. In fact, what the RBI Governor needs right now is a good team of Deputy Governors who can assist him in making the right policies.Amol Agrawal is faculty at Ahmedabad University. Views are personal.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.