The new Reserve Bank of India (RBI) governor Shaktikanta Das on Wednesday dropped enough hints that he would be more amenable to the views of the government and other stakeholders, including the industry, than his predecessor Urjit Patel. Addressing the media a few hours after assuming charge, Das asserted that the central bank’s autonomy would be upheld, but added a caveat that “every institution must also adhere to accountability”, echoing finance minister Arun Jaitley’s recent statement amid straining of the government-RBI ties.
It seems Das is favouring a nuanced stance on setting the goals of the monetary policy, though an amendment to the RBI Act in August, 2016 settled the growth-inflation debate by ushering in the inflation-targeting framework. “The maintenance of the growth trajectory of the economy is also important and there are several areas that a central bank has to deal with,” he said, while his two immediate predecessors would look at growth imperative only after the inflation mandate is squarely addressed.
Later in the day, official data showed retail inflation has been undershooting RBI’s target for the 4th consecutive month in November, as it cooled to an about one-and-half year low of 2.33%. After a spike seen in October, core inflation too moderated to 5.7% in November, its lowest in FY19 so far, prompting analysts to aver that the monetary policy committee would likely announce a change in stance to ‘neutral’ in early February from ‘calibrated tightening’ currently (some didn’t even rule out the next rate action to be reduction).
The new governor also attached a higher premium than Patel to a consultative approach to decision-making while also saying, “the government is not just a stakeholder, but the government of the day runs the economy, the country and manages major policy institutions”.
A bid to extend the RBI board’s role beyond being purely advisory is believed to be one of the flashpoints that led to the resignation of Patel. Das said the board meeting scheduled for Friday, where the governance structure of the RBI is expected to be the key issue, will take place as planned.
The governor will also be meeting the heads of Mumbai-based public sector banks (PSBs) on Thursday. Meetings with heads of PSBs based in other cities and private banks would follow, he said. “Decision-making in today’s world has become far more complex (than earlier) and consultations with stakeholders is very important. It always adds value to our understanding of issues, it adds depth to our understanding of issues. Therefore, I propose to undertake consultations wherever necessary, as per requirement in a need-based manner on various issues,” Das said.
For much of this year, the Patel-led RBI was seen resisting pressure as well as entreaties from the government, industry and financial firms to ease lending and capital norms for stressed PSBs, particularly those under the prompt corrective action (PCA) framework, open a special liquidity window for non-banking financial companies (NBFCs) with a precarious asset-liability position and push the flow of credit to small enterprises. Das refused to dwell on any of these specific issues that caused the strain in the relationship between the government and the RBI.
Thanks to suasion by the government nominees, the RBI board in its last meeting on November 19 decided to set up a committee to review the central bank’s economic capital framework. While the government’s objective is obviously to get a larger chunk of the RBI reserves — the current policy is to transfer only the realised profits to the government each year — the two sides are yet to take a call on who will head the panel.
Nomura said: “Overall, the new RBI governor’s first speech confirms our initial impressions. He is likely to be more communicative and consultative in his approach, which is a positive. On policy, it does appear that he is likely to relax regulatory norms for banks (make them more counter-cyclical) and he will be more proactive in injecting liquidity. His focus on growth and his view that inflation remains benign confirms our view that he is more neutral to dovish on monetary policy, and supports our view of a reversal in the policy stance to “neutral” in early 2019, followed by an actual rate cut in 2019 (we currently expect a 25bp cut in Q3).”