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Will 'FinMin-insider' Shaktikanta Das be able to preserve RBI's autonomy?

Das, a career bureaucrat, is seen as someone who can ease tensions with the state, prompting a mixed reaction from markets

Siddhartha Singh & Anirban Nag I Bloomberg 

Shaktikanta Das
Shaktikanta Das

India’s new central bank has a list of challenges to face as he takes office: from fixing a banking crisis to convincing investors of the institution’s autonomy.

Shaktikanta Das, 61, a former economic affairs secretary at the Ministry, took charge at the for a three-year term on Wednesday, two days after Urjit Patel quit amid worries that the government was encroaching on the central bank’s turf. Das, a career bureaucrat, is seen as someone who can ease tensions with the state, prompting a mixed reaction from markets.

Sovereign bonds rallied on optimism he may shift the monetary policy stance to a less hawkish one. The rupee, Asia’s worst-performer among major currencies this year, dropped as much as 0.4 percent against the dollar, amid concern over the central bank’s independence and recent state election results.

“Mr. Das will be initially considered more as a Ministry insider, and only time will tell whether he preserves the RBI’s independence,” said Sonal Varma, an economist at in Singapore. “Our analysis of his views suggests that he has a neutral-to-dovish bent on monetary policy. We expect regulatory policies under his governorship to be more sympathetic to the government’s arguments.”

Das’s first test comes on Friday when the central bank’s board is due to meet. The government is expected to push for tighter supervision of the RBI, including setting up committees to have oversight of various functions, from foreign exchange management to financial stability.

A former economic affairs secretary from 2015 to 2017, Das worked closely with the central bank and oversaw Narendra Modi’s controversial plan to ban high-value notes in late 2016, an exercise that hurt the economy and led to thousands of job losses. He is currently a member of the Commission of India, and serves as the government’s representative at the Group of 20 summits.

He will also need to win over colleagues at the Speculation is rife that Viral Acharya, the deputy in charge of monetary policy and Patel’s messenger in the public showdown with the government, may step down. It was Acharya who delivered a hard-hitting speech in October warning the government against undermining the central bank’s independence. That caused friction between the authorities and Patel, resulting in his departure on Monday.

The government is pushing the to hand over more of its capital to the government and loosen curbs on some of the weakest to ensure lending continues ahead of an election next year.

“Das’s appointment as the next is likely to keep investors and markets worried about RBI’s independence, given his close ties with the government,” said Priyanka Kishore, an economist at Oxford Economics in Singapore. “Further clarity will emerge only once we know the new governor’s stance on the key regulatory and capital management issues that have become the bone of contention between the RBI and government.”

economists said Das’s near-term challenge will be to address tensions between the RBI and government. They don’t expect the appointment will lead to any changes to the RBI’s monetary policy framework.

Das will take charge of the six-member monetary policy committee, which left interest rates unchanged last week after two hikes earlier this year. With inflation undershooting the central bank’s forecasts, there are growing expectations that the RBI will shift to a neutral policy stance from its current tightening bias, which could set the stage for a rate cut.

Modi initially brought Das into the to head the revenue department, later moving him to economic affairs, where he oversaw the demonetization program.

The government will look to Das to help provide much-needed liquidity to the banking system. Authorities want the RBI to do more to support crisis-ridden shadow banks, which accounted for at least 3 out of 10 fresh loans in the past few years. The crisis in the sector threatens consumption, the bedrock of Asia’s third largest economy.

The new governor will also have to sort out debt defaults in a banking sector saddled with bad loans and share oversight of state-run with the government.

“He is a brilliant team leader, a great consensus builder and highly communicative,” Amitabh Kant, chief executive officer of the government thinktank NITI Aayog, said in a post on Twitter. “Will focus on India’s economic growth while ensuring RBI’s autonomy.”

First Published: Wed, December 12 2018. 14:05 IST
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