While it is true that institutions are more important than the person, ideology and approach of Governors of central banks are important
Madan Sabnavis, chief economist, CARE Ratings (Photo: PHOTO CREDIT: Kamlesh Pednekar)
The extension given to Mr. Shaktikanta Das, the governor of Reserve Bank of India (RBI) is good news for the market, as the economy is in the preparation mode for a takeoff. The government has quite rightly made the announcement before the term came to an end so that there is certainty on all sides. From a market perspective, this means that the mindset of the Governor is known and there will be no surprises, which could have been the case in case of a change.
While it is true that institutions are more important than the person, ideology and approach of Governors of central banks are important. Mr. Das has followed a very cogent approach of patiently hearing out the market before taking any decision, which has been a strength. There have hence been some major achievements under his first term, which has helped the economy and market.
The first is the ability to deal with conflict and collaborate with the government, which is very important in public policy. Mr. Das has taken along all the stakeholders- government, markets, banks, employees and public opinion. This is in contrast to Dr. Raghuram Rajan who could be more outspoken, which though a prerogative of an academician, could have been more guarded when part of the policy-making team. At the other end was the taciturn Dr. Urjit Patel, whose silence often opened the doors for interpretation, which in turn created perceptions in the market which may not have been right. Having worked with the government in different capacities, Mr. Das has recreated the image of the RBI as an institution, which is in harmony with the stakeholders while taking tough decisions. Maybe his successful tenure supports the view that the right candidate for Governorship is one who has worked with the government as at the end of the day the central bank and Ministry of Finance are part of the same broader set up.
The second has been the way the central bank has worked tirelessly during the pandemic times. This was critical because for the first time the RBI came up with very innovative tools like long-term repo operation (LTROs), TLTROs, operation twist, V3R, GSAPs etc. to ensure that targeted liquidity was available to the market. As banker to the government, the RBI had to ensure that the large government borrowing programme not only went through at a fair cost but also did not crowd out the system. While the economy was in a trough, and demand was limited for funds, the RBI had to ensure nonetheless that there was enough liquidity.
Third, restructuring of loans of SMEs, one-time restructuring (OTR) for larger companies and moratorium were some key measures taken to ensure that there were no adverse consequences of the lockdown on the quality of assets. The possibility of large defaults was always there, and this was guided well through these measures, and it does look like that the worst is over on this count.
The fact that the Governor has reiterated the central bank position when reading out the credit policy statement is comforting as it is known that the easing of liquidity must end sometime, and rates must move up. But providing guidance on the distance to these changes is important and must be calibrated which is what the Governor has been doing by stating the gradualism approach. This means no rude shocks, which is the way to go.
Madan Sabnavis is chief economist at CARE Ratings and author of: Hits & Misses: The Indian Banking Story. Views shared here are personalDisclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.