Days after the demonetisation exercise was announced by the Narendra Modi government on November 8, 2016, dairy product maker Amul, known for its humorous advertisements on contemporary issues, released one featuring Shaktikanta Das, the then economic affairs secretary and Urjit Patel, the then Reserve Bank of India governor, indicating as the two sides of the demonetisation coin.
Das was said to be in contention for the governor’s post after Raghuram Rajan’s term ended in September of the same year. Little would have Das known that he will move to RBI in two years after having ‘lost out’ to Patel in 2016.
And how? The other side of that same coin resigned all of a sudden on December 10, 2018, amid reports of a rift with the Modi government. The government barely took 24 hours to announce Das’ name as the 25th governor of the Reserve Bank of India after Patel’s resignation.
And yet again, the government reposed its trust in the 64-year bureaucrat turned central banker by extending his term by another three years. The re-appointment announcement comes more than a month before his first term expires – which is slightly surprising from a government that is known for last-minute decision making, especially regarding appointments. (The October 2020 monetary policy meeting had to be postponed since the government was unable to make the appointments of the three external members of MPC. RBI deputy governor appointments are also routinely delayed). The signal from the government with this early decision was clear – to avoid any speculations in the market; and their unflinching trust on Das.
Das, when he completes the second three-year term, will be the first in seven decades to be the longest as RBI governor.
Tackling one crisis after another
There are reasons for the Modi government’s confidence in Das.
Das took over as the governor when the relationship between RBI and the government was at its lowest in many years. There are issues with RBI’s autonomy; on how much surplus it should transfer to the government, among others. The surplus issue was resolved by an external panel which suggested a formula. Issues of central bank autonomy, coordination with the government vanished from the discourse soon after Das took charge.
Another crisis was brewing in the background. After the collapse of IL&FS in September 2018, the non-banking finance companies faced a crisis of confidence as commercial banks choked lending to them. NBFCs depend heavily on banks to raise resources. Shadow banks have grown over the years, which contributed about 20% of the total lending that are extended in the economy. They lend to the entities which the commercial banks are not excited about – small enterprises, individuals with no credit score, for example. Taking cognisance of the situation, RBI, under Das, announced a host of liquidity measures, targeted at the NBFCs and the MSME sector, to help these entities tide over the liquidity crunch.
A record government’s borrowing programme of Rs 13.7 lakh crore was managed by RBI, under Das, in the previous financial year. In the pandemic ravaged year, the borrowing programme was managed with the lowest borrowing cost in 15-16 years. Das had said in 2021-22 also, RBI will be able to manage the government’s market borrowing programme – Rs 12 lakh crore – in the most non-disruptive manner.
“Let there not be any doubt about this”, Das had said when asked about the government’s market borrowing programme. Under Das, RBI introduced an ‘operation twist’ – that is buying and selling of government securities simultaneously in a bid to manage yields and improve the transmission of monetary policy.
No depositor lost money
Two bank failures were handled smoothly by the banking regulator during the last three years of Das. First was Yes Bank just before the onset of the Covid-19 pandemic in March 2020, and then Lakshmi Vilas Bank (LVB).
Not a single depositor lost money as those two cases were resolved smoothly. Yes Bank was revived with the help of the State Bank of India and a host of private banks, and LVB was merged with DBS India.
The revival process of Punjab and Maharashtra Cooperative Bank, which is under restrictions since September 2019, has entered the last stage with Unity Small Finance bank receiving the final approval from RBI to start operations. PMC will be merged with Unity – a joint venture between Centrum Financial and Bharat Pe. Das cracked the whip on errant shadow banks too. The board of Dewan Housing Finance Ltd and SREI Group was superseded and was referred to the National Company Law Tribunal for resolution.
Once in a century pandemic
The central bank’s response to the Covid-19 pandemic is probably the most defining aspect of Das’ first term in RBI. Days after the nationwide lockdown was announced by Prime Minister Modi on March 25, 2020, to curb the spread of the pandemic, the six-member monetary policy committee which is chaired by the RBI governor announced a steep cut in the repo rate, by 75 basis points.
This was followed up by another 40-bps rate cut during the next monetary policy review meeting. The MPC probably saw the devastation that the economy was about to face and hence was proactive. (GDP contracted 7.3% in 2020-21).
Not only rate cuts, but the banking regulator also announced a moratorium for borrowers for six months – which was a huge relief for the sector that bore the brunt of the economic recession.
A host of liquidity support was also provided to the MSME sectors, which faced the heat as economic activity came to a halt due to the draconian lockdown. Most importantly, Das made it abundantly clear that RBI will support growth and maintain an accommodative stance till growth revives on a sustainable basis – a promise which RBI has continued with ever after more than 18 months since the onset of the pandemic.
Returning to normalcy
The biggest challenge that the Indian central bank will face in the second term of Das is returning to normalcy. Withdrawing the current huge liquidity overhang will not be easy.
The process has already started with the tapering of the government securities acquisition programme (GSAP). The next step in the path to return to normalcy is to increase the reverse repo rate, analysts expect. The reverse repo rate was reduced more than the repo rate since the beginning of the pandemic, and it’s time the gap narrowed as it was before the pandemic – a view that is also expressed by one of the MPC members – Jayanth Varma.
The pandemic forced the central bank to take its eye off the inflation target – the primary mandate of RBI. As normalcy set to resume, the MPC had to return to 4% consumer price index-based inflation targeting.
Because, there are downside risks to inflation, mainly emanating from the hardening of commodity prices, particularly international crude oil prices. The US Fed may also soon start tapering its asset purchase programme as early as this month, which could result in the flight of capital from emerging economies. India is, however, better placed as compared to 2013, with record foreign exchange reserves which are enough to cover 16 months of exports, as compared to 7 months then.
Not to forget growth is uneven and there is a large output gap. The pandemic is not yet over, supply-side bottlenecks still continue. Single-minded inflation targeting could well turn out to be counterproductive.
Das, widely seen as a dovish central banker as compared to his last two predecessors, emphasized a gradual path to normalisation.
“At this critical juncture, our actions have to be gradual, calibrated, well-timed and well-telegraphed to avoid any undue surprises,” Das said, as the minutes of the last monetary policy review meeting showed, on the road ahead.
Monetary policy needs to have an element of surprise, conventional central bankers would argue. But not in the time of a once in a century pandemic, as Das seems to suggest.
(The writer is a Mumbai-based journalist)