A year ago, on 12 December 2018, Shaktikanta Das took charge as the 25th governor of the Reserve Bank of India (RBI). That was the time when the central bank had locked horns with the Narendra Modi government publicly over a host of contentious issues. These included the issue of the central bank's autonomous functioning and the dispute over dual regulation of state-run banks.
Das' immediate predecessor in office-Urjit Patel, had just resigned which many said was a protest move against the Narendra Modi government for attempting to tie his hands on crucial decisions. Patel's resignation came after the government threatened to invoke Section 7 which it could use to give special directions to the central bank.
Shortly before his resignation, one of Patel's deputies, Viral Acharya, had made a scathing attack on the government on the issue of RBI's autonomy in one of his speeches.
Das, a former senior bureaucrat at the centre who spearheaded Modi's demonetisation programme, had three specific but interconnected tasks chalked out: Tame the rebellious central bank and make it walk the way its boss wanted (the RBI Act doesn't promise absolute autonomy to the central bank; the government is the boss of the RBI), address the issue of open confrontation between the two constitutional bodies that had been making headlines internationally, and work on some major proposals the government had been pitching unsuccessfully before Patel.
Das, a hard taskmaster
One year into his term, Das has achieved all three of the above. Ever since the new governor took charge, there has not been even a single instance of a clash between the RBI and government, The RBI's top brass including the deputy governors have completely abstained from making remarks in public on contentious issues, mainly the RBI autonomy debate in their speeches and interviews. The government has got most of what it has been asking for from the RBI.
An expert panel under Bimal Jalan worked out an Economic Capital Framework (ECF) that enabled the government to tap capital reserves from the central bank. It was based on this formula that the RBI decided to transfer Rs 1.76 lakh crore extra capital to the government, out of which Rs 52,637 crore was additional money as per the revised ECF. The RBI chose the lower band of the 5.5-6.5 percent range proposed by the Bimal Jalan-led expert panel for the purpose of computing the amount of surplus that needs to be transferred to the government. The RBI maintains contingency reserves for use in the event of extreme financial crisis situations when the economy and currency markets collapse and governments are no longer in a position to manage the economic situation.
The Jalan panel, while suggesting the desired 5.5-6.5 percent band, said at the upper band, there will be an excess of risk provisioning to the extent of Rs 11,608 crore and at the lower band, Rs 52,637 crore.
The RBI's central board decided to maintain the realised equity level at 5.5 percent of the balance sheet and the resultant excess risk provisions of Rs 52,637 crore were made available to transfer to the government. An analysis of the annual reports of the RBI showed that at 5.5 percent, the central bank's contingency fund (CF) reserves are presently at the lowest level in at least 19 years.
An articulate governor/consensus man
Unlike Patel, Das has presented himself as an articulate governor in public interactions. At his first presser after taking charge, he appeared to be everything his predecessor Urjit Patel was not. Das appeared relaxed and confident considering the strained circumstances under which he was given the governor's job, fielded most questions posed and, unlike his predecessor, chose to address the media without deputies by his side. This is in stark contrast with a typical Patel presser which used to be mostly monologues. Patel either passed tough questions to his deputies or abruptly ended his answers without getting into the specifics. During his two and half years tenure as governor, Patel made himself visible to the public on very few occasions and spoke at even fewer ones. That won him the tag of a bad communicator and left the world to guess his thoughts.
In contrast, Das came across as a man who loves to talk and take questions. Insiders in the central bank observe him as a consensus man. He is probably the first RBI governor who maintains a personal Twitter account and unlike most of his predecessors, has cordial relations with the political administration at the centre.
Inflation vs growth
Post-the constitution of Monetary Policy Committee (MPC), the RBI governor doesn't have the same prominence in policy setting as in earlier days. The governor is only one of the members deciding the course of policy. However, if one looks at Das' one-year so far, the monetary policy has been heavily tilted towards supporting growth rather than focusing on inflation.
The RBI has acted on predicted lines. In the current cycle of policy, the RBI has cut rates by a total of 135 basis points. One bps is one-hundredth of a percentage point. Inflation has largely been brought under control. However, the RBI under Das hasn't had much luck to make monetary policy transmission effective as banks continue to be reluctant to pass on rates.
At a time when the Indian economy is facing a steeper-than-expected slowdown, the financial markets were expecting more rate cuts from the central bank but the RBI chose to hold in the latest policy. The repo is currently at 5.15 percent.
Das' big challenge, in the remaining part of his three-year term, will be a slowing economy. India's economic growth is falling fast and the slowdown appears to be more broad-based now. The GDP growth in the second quarter fell to 4.5 percent after a disappointing 5 percent growth in the June quarter. The growth across eight core sector industries have been indicating that economic activities have been slowing in a worrying manner.
Economists have been attributing the current slowdown to a demand slump arising out of a loss of consumer confidence. Monetary policy could do very little to address the demand slump. As things stand, the economic recession is likely to stay for a longer than expected period and the central bank, with limited weapons in its arsenal, has a tough task ahead.
--With data support from Kishor Kadam