10 key events, policy decisions during Shaktikanta Das' first stint at RBI

Here are the 10 important events, policy decisions that Das undertook after becoming the 25th governor of the RBI on Dec 12, 2018

Shaktikanta Das’s first tenure was eventful for many reasons. Perhaps, it was one of the most eventful three years considering he isn still battling a once in a century crisis in the form of the Coronavirus (Covid-19) pandemic.

Here are the ten important events and policy decisions that Shaktikanta Das undertook after he became the 25th governor of the central bank on December 12, 2018.

1. Focus on growth

On day one, in a press conference, Das clearly mentioned that inflation was important, but so was growth. Subsequently, as the Coronavirus spread, Das let the inflation rise above the upper limit of the tolerance band (6 per cent) for more than three quarters in 2020, and lowered the interest rates further in an extraordinary accommodation that can only be called India’s own version of quantitative easing.

Having said that, the governor has time and again assured the central bank will not let runaway inflation hit the country. Rather, the central bank has a “laser-focus” on prices, he said recently.

2.  Rate cuts

The RBI lowered policy repo rate by 250 basis points under his tenure, starting from the first monetary policy in February 2019. Till the Covid-19 pandemic set in, the central bank had lowered the repo rate by 135 basis points to prop up growth. After the Covid-19 pandemic, the monetary policy committee met out of turn to lower rates, apart from reducing the rates in monetary policy. The monetary policy committee (MPC), however, stopped paring rates after the August 2020 policy, where it brought down repo rate by 40 basis points to its historic low of 4 per cent. In between, the central bank acted unilaterally to reduce reverse repo rate to 3.35 per cent. The central bank, after the August policy, focused mainly on the liquidity front in order to keep borrowing cost low both for the government and the private sector.

3. Foreign exchange reserve accumulation

Under Das, the central bank embarked on a massive foreign exchange reserve accumulation spree. When he took over, India’s foreign exchange reserve was about $455 billion. Das took it to $641 billion, including the recent $17.86 Special Drawing Rights by the International Monetary Fund (IMF). The aggressive reserves accumulation caught the attention of the US Treasury, which has put India on the currency manipulator watchlist, along with 9 other countries. The governor maintains that emerging markets like India must have the insurance of reserves to deflect volatility caused by the policies of central banks in developed countries. 

4. Banking system liquidity 

Soon after Das became governor, RBI infused over Rs 3 trillion of liquidity in the banking system through secondary market bond purchases. Even as he brought out 6 banks from the restrictive prompt corrective action (PCA) framework, sensing damage to the credit scene, Das did not go easy on bank management continuing with bad debt underreporting.

5. Action against bank chiefs

Das was strict with big names of the Indian banking industry. Under his watch, celebrity bank CEOs lost their jobs on corporate governance issues. Yes Bank was sold off, and the founder managing director was denied a reappointment for underreporting of bad debts and on corporate governance issues.  Recently, by superseding the boards of two NBFCs of the SREI Group, RBI made its intent very clear that it will not take corporate governance lapses lightly.

6. PMC Bank crisis 

Das' tenure also saw a massive banking fraud that nearly sank the large multi-state co-operative bank, PMC. It was found that more than 75 per cent of the nearly Rs 9,000 crore advances were swindled away by one real estate group in connivance with the management. The depositors are yet to get the money, but the RBI has managed to merge the bank with a small finance bank and a proper resolution could be in place after about two years.

7. IL&FS and DHFL

IL&FS collapse in August 2018 was India’s Lehman moment. It froze liquidity tap for non-banking financial companies and the RBI had to step in. The collapse did not happen during Das’ tenure, but he had to handle the repercussions from the very beginning. And then, one of the largest housing finance companies in India, DHFL defaulted on its bond payments, plunging the sector into a further crisis. Das’ RBI did a remarkable job in infusing liquidity and confidence in the sector even as it kept a close vigil on the top 50 NBFCs in the space. 

8. DBS-Laxmi Vilas Bank merger

The Yes Bank issue may have alarmed the RBI. Rather surprisingly, it announced a merger of crisis-driven Laxmi Vilas Bank with the Indian subsidiary of DBS Bank to protect depositors’ interest. There was no usual bids asked for, but it was a forced sale of sorts. 

9. Covid crisis

The Covid crisis is ongoing, and the RBI’s “accommodative stance” continues. The “whatever it takes” policy of the RBI was extraordinary in every sense and no less than what the global central banks pursued, albeit within its own economic parameters. Das’ RBI infused as much as Rs 13 trillion of liquidity in the banking system through various means, carved out special liquidity channels for NBFCs, micro small and medium enterprises, as well as individuals. Das’ RBI offered moratorium twice to stressed borrowers, and for companies, special restructuring packages were formulated with the government. The policy normalisation will take a long time, but the RBI has started the process. Nevertheless, Das’ RBI remains “battle-ready to face any adverse situation” that may arise, and remains committed to maintaining the financial stability of the system. 

10. Managing record borrowing

The RBI, as the government’s debt manager, borrowed a record Rs 12 trillion from the market at a 16-year low average cost. This is a remarkable achievement, notwithstanding the crisis, and especially as the government is again borrowing Rs 12 trillion from the market in this financial year, which the RBI is managing at a rate that is not commensurate with the gravity of the pandemic situation. As debt manager of the RBI, Shaktikanta Das’ RBI deserves kudos.