Restoring credibility

New team at RBI comes up with sound, consistent guidance

Recent events suggest that the Reserve Bank of India (RBI) is on the path to re-establishing its credibility. One widely expressed concern following the withdrawal of high-value currency notes last November was that the RBI, in the course of acquiescing to and implementing the programme, was in danger of losing a certain amount of credibility in the eyes of observers. Its hard-won reputation for independence and stability, bolstered by its decision to move to a monetary policy committee system and to formally become an inflation-targeting central bank, seemed to be under threat. However, it has in the recent past gone some distance towards recovering that reputation.

The statements of RBI Governor Urjit Patel with regard to loan waivers, which are currently enjoying a period of unfortunate popularity with the political class, are a prime example. Mr Patel has warned that such loan waivers serve to exacerbate moral hazard, and “undermine an honest credit culture”. This was an important corrective to the narrative, and a reminder to the central government and the ruling Bharatiya Janata Party of the dangers of waiving loans to banking stability and the national balance sheet.

Another major regulatory issue in the purview of the RBI that has political implications is the non-performing assets (NPA) crisis in public sector banks. An important recent speech from RBI Deputy Governor Viral Acharya made it clear that action on this could not be delayed further. Mr Acharya said that “we simply don’t as a society have any excuse or moral liberty to let the banking sector wounds fester”. Mr Acharya, speaking at a conference organised by the Indian Banks’ Association, outlined various solutions to the NPA resolution problem. He pointed out that the private sector could be involved in rescuing assets in sectors that could have economic value in the short run, such as metals, telecom and textiles. Promoters, he emphasised, should have no say in determining the nature of the restructuring plan chosen. Meanwhile, public action would be needed in sectors where assets might be economically unviable in the short- to medium-term, such as the power sector. Any entity that supervised this process would need to be wound up in an orderly manner once the stressed assets were resolved. And finally, he argued that there were alternatives to recapitalising public sector banks that should be considered, including the divestment of ownership — in other words, outright privatisation.

The government must also pay heed to Mr Patel’s plainspeak on other key issues. For example, the RBI has reminded the government in the monetary policy that there will be “clearly more demand for capital” in the coming days. Also, the RBI has pointed out there is room for more cuts if rates on small savings schemes are corrected. Though a formula-based rate was adopted to set these rates last April, small savings schemes still deliver higher returns than what they should if the formula is followed, as per the RBI.

There has also been firm action by the central bank recently in directions that increase the stability and effectiveness of monetary policy, without regard to political consequences. The last two monetary policy statements have demonstrated that the RBI monetary policy committee has no intention of pleasing the market or the finance ministry, and is determined to watch the path of inflation going forward with extreme care — which is, indeed, its mandate. There is a consistency and a watchfulness to these two statements that suggests, together with the other indications above, that a sound team is coming together to manage both the regulatory and the policy-setting side of India’s central bank.