The appointment of Shaktikanta Das as the new governor of the Reserve Bank of India (RBI) is not really unexpected as his name was definitely doing the rounds for some time. The reason is that he has experience to back his candidature and has dealt with international agencies too in his career in the Department of Economic Affairs which makes him quite appropriate for this position. He has been on the board of the RBI and knows what has to be done.
He has worked with the government and hence knows how the machinery works which is very important at a time when there is constant dialogue needed between the Central bank and the Finance Ministry. As he has been dealing with the rating agencies and institutions like the International Monetary Fund (IMF) and the World Bank, Das is aware of the global protocol.
The choice this time was expected to be from the government rather than from the academia. Also the fact that he has worked in India gives an advantage which should help formulate policies where local conditions are important. It would hence be more hands-on with less of the theoretical underpinnings.
What are the main challenges for the new governor? Presently, there are quite a few issues which are pending either through the committee route or at the central bank level which have to be taken up. Some of the committee formulation work has been held up as the members of the same had to be decided which will hopefully be done so that there is resolution of various issues.
First the issue of transfer of government reserves has to be resolved. The RBI has so far held the view that this should not be done while the government has averred that this can be done as the money belongs to the people of India. Whichever way it may be interpreted, it is necessary to have clarity on how to proceed on this issue. Das has worked with the Finance Ministry and involved with budgeting and will hence be able to guide the best way to making this happen in a seamless manner provided that is the consensus.
The second issue, which has to be taken up, relates to the Insolvency and Bankruptcy Code (IBC). This was a strong step taken by the RBI to resolve the non-performing assets (NPAs) and the opposite view came in the form of relaxation for certain sectors. The RBI has held on to its position as it felt that if such relaxation was permitted for one sector it can be done for others. It can be expected that the governor will take this one in a balanced way to accommodate the views of both the sides so that the best results can be obtained. This will be keenly watched by the global rating agencies in particular as it does involve the quality of the banking system which is being questioned given the high level of the NPAs especially with public sector banks (PSBs).
The third issue is dealing with the prompt corrective action (PCA) norms. The RBI has been firm about not relaxing any norms for these banks until their financial health improves while the view other side is that some bit of accommodation has to be permitted to enable the flow of credit. This is bound to be reviewed and based on the ground level position decision taken. But it will require a decision to be taken which will need a lot of analysis to be done as this is also a tricky issue. Allowing weak banks to lend more will lead to more NPAs being created and maybe in a phased manner lending can be opened up to the less risky sectors like retail.
The fourth issue relates to the provision of liquidity. While the problem has been tackled through the open market operation (OMO) as of now, the RBI will have to devise a policy on whether at all it should intervene when specific sectors like the non-banking finance companies (NBFCs) run into such a problem. Should there be special windows of finance and if so to what extent and form can it be provided? This is important because the traditional mode of support is through the repo or OMO and there is no direct interface between the RBI and other market players. Can we think of quantitative easing (QE) kind of a set up where central banks buy securities held by say the NBFCs?
Fifth, a pressing issue has been the small and medium-sized enterprises (SMEs) and their access to finance. Here too, the RBI has set up committees and the task for the new governor is to ensure that there is an output plan that can be followed by banks to ensure that this is done without compromising on quality of assets.
Interestingly, when Raghuram Rajan took over, he had an agenda of getting after the NPAs issue besides other development work like the new banks and restructuring of the monetary policy approach. Urjit Patel had the more onerous task of enabling demonetisation as well as taking on the NPA mess which created quite a few controversies. Das would have to take all these issues to their logical end so as to iron out any differences with the government so as to put the system back on equilibrium.
But for sure his entry and approach to addressing these issues will be looked at clearly by the market as well as global rating and multilateral agencies as it will send strong signals. He would have to dexterously keep explaining why the RBI has changed its stance on some of the issues (if at all) where there was less flexibility shown in the past. This would be the main challenge.
(The writer is chief economist, CARE Ratings)
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Updated Date: Dec 13, 2018 10:31:55 IST