When Dr. Urjit Patel resigned from the top job at the RBI, the speculation was rife on who would be the next RBI governor. The government finally opted for a career bureaucrat in the form of Shaktikanta Das to take over the top job at RBI. Das is not new to handling the contrary pulls of politics and economics having already handled the very critical demonetization exercise by the government in late 2016. How he does at RBI remains to be seen, but here are some interesting points pertaining to Das and his role that needs to be remembered.
Decoding Shaktikanta Das and his role in the Indian financial story
- The incumbent RBI governor, Shaktikanta Das, is no outsider to the Indian financial system. He was formerly the secretary of the Department of Economic Affairs and retired as the Economic Affairs Secretary in May 2017. Essentially, Mr. Das was brought out of retirement to take over at the helm of the RBI for a period of 3 years.
- Das is a 1980 batch IAS officer from the Tamil Nadu cadre. He served for a long period in the state of Tamil Nadu and that is also one of the reasons why Das is extremely fluent and comfortable taking questions in the Tamil language. In fact, Das has held key positions during the Congress rule as well as during the BJP rule, which makes him a largely neutral figure and not directly identified with any political party.
- Bureaucrats are nothing new to the top job at the RBI. Both Dr. Y V Reddy and Dr. Subba Rao were top bureaucrats before they took over at the helm of the RBI. As a former bureaucrat, Das not only brings his immense administrative experience to the table but also his understanding of the nuances of the Indian bureaucratic system. During the reign of Dr. Rajan and Dr. Patel there were constant clashes between the RBI and the Finance Ministry on key policy issues. With a bureaucracy insider at the helm of RBI, these frictions are likely to be reduced as Das brings an understanding of both sides of the table. That should help smoothen the rifts that had manifested in the last 5 years.
- One of the concerns that the market had with Dr. Patel was that his communication with the market community and the press was extremely limited. That had created gaps in the market understanding of RBI policy and stance. With Das, already a master communicator via Twitter, these issues of communication are likely to be ironed out. The markets are likely to view this positively.
- It is expected that Das would not restrict himself to communicating policy but also give guidance like the US Fed does quite effectively. Bond markets, especially, look for meaningful cues on the direction of inflation and interest rates. These were macro areas where Dr. Patel was largely silent on and preferred to only communicate through the standard policy protocol. Bond markets are expecting a more vibrant communication framework under Shaktikanta Das.
- The last meeting between the RBI and the government largely ended on a conciliatory and optimistic note and that could be an indication of the shape of things to come. Das is known to be a master consensus builder, which is what will be really needed by the RBI in 3 specific areas. Firstly, the issue of the government using the RBI reserves to bridge its financing gap will have to be addressed. There has to be a mid way between Section 7 and full autonomy and that is the fine line that Das has to tread. Secondly, the RBI needs to do a balancing act on liquidity for the NBFCs and deserving banks. However there is a thin line between giving support and going overboard. Lastly, the RBI must have full autonomy on monetary policy and Das must work on restoring the autonomy of the RBI on that front.
- Prompt correction action (PCA) is another area to be addressed. Das has the luxury of getting nearly Rs.1 trillion this year as recoveries from the NCLT. That has to be channelled into productive credit so that growth once again picks up. However, the banks with NPAs above 15% cannot be allowed to lend as it can only aggravate the NPA problem. Here again, Das has to tread a thin line.
- Lastly, there is the baggage of demonetization that Das brings with him. He was the finance secretary and fully behind the demonetization move. While it did create frictions in the business community, demonetization also had its benefits in terms of digitization and cleaning up of bank books. Das has to again tread a fine line. What is immediately called for is a transparent disclosure of the performance of demonetization and also follow up action. This is where Das is best equipped to make the difference.
In his rather illustrious career, Das is not new to controversies and balancing acts. This is likely to be his biggest test.