Shaktikanta Das would be required to adopt a calibrated liquidity management approach and boost credit growth.
The former bureaucrat, who took charge of the top job at the central bank on December 10, 2018, started his next three-year stint on Saturday.
In the past three years, Das has led the RBI through some of the most difficult situations. A 1980-batch officer of Indian Administrative Service (IAS) Das took charge after his predecessor Urjit Patel resigned from his position abruptly before the end of his term.
While Patel had resigned citing “personal reasons”, it was widely speculated that the main reason for his exit from the central bank was the differences with the government.
So, the first major challenge for Das was to bridge the differences brewing between the central bank and the government, on the one hand, and uphold the credibility and autonomy of the institution, on the other.
Unsurprisingly, the government-RBI relationship dominated the first press conference of Das as RBI governor three years back.
Commenting on the differences between the government and the central bank Das had noted, “I wouldn’t go into the issues between RBI and the government but every institution has to maintain its autonomy and also adhere to accountability.”
“I don’t know whether the government-RBI relationship is blocked, but I feel stakeholder consultations have to go on,” he added.
Das, a prominent face of the government during demonetization, has fairly succeeded in eliminating the differences between the government and the RBI.
Barely a year after Das took charge as RBI governor COVID-19 pandemic hit the world. As a key economic policymaker Das has faced challenging times in managing the disruptions caused by the COVID-19 pandemic. He chose to cut the policy repo rate to a historic low of 4 per cent in May 2020 and has continued with the low-interest rate regime since then.
Before taking over the charge as the RBI’s 25th governor in December 2018, Das served as Revenue Secretary and Economic Affairs Secretary in the Ministry of Finance.
He also served as India’s G-20 sherpa and was appointed as a member of the 15th Finance Commission. Das’s second term ends in December 2024. When he completes his second term, Das will be the first RBI governor in seven decades to have such a long tenure.
In the last monetary policy review of the first term as RBI governor, Das decided to maintain a status quo on key policy rates. Repo rate and reverse repo rate have been kept unchanged at 4 per cent and 3.35 per cent, respectively.
The Repo rate is the interest at which the RBI lends short-term funds to banks, while the reverse repo rate is the interest that the RBI pays to the banks on their deposits. The RBI has also decided to keep the Marginal Standing Facility (MSF) rate unchanged at 4.25 per cent.
As Das begins his second term, he has his task cut. The central bank has maintained a low-interest rate to help the economy, hit badly by COVID-19 pandemic-induced lockdowns. There have been good signs of recovery in GDP growth in the recent quarters.
India’s GDP grew by 20.1 per cent in April-June 2021 quarter against a contraction of 24.4 per cent recorded during the corresponding quarter a year ago. During July-September 2021 quarter the GDP expanded by 8.4 per cent against a contraction of 7.4 per cent recorded in the same period last year.
Though there has been a good recovery, the level of India’s GDP is still below that of the pre-COVID period. Thus, continued policy support is needed to keep the GDP growth momentum going.
Going forward Das will face a bigger challenge in keeping inflation under control. Though inflation has remained within the RBI’s target of 2-6 per cent, the recent trend is worrying. Consumer Price Index (CPI) inflation is expected to rise to 5.7 per cent in the fourth quarter of the current financial year from the projected 5.1 per cent in the third quarter, as per the RBI estimate.
The headline CPI inflation is projected to remain at 5.3 per cent in the current financial year. As per the RBI, CPI inflation is estimated to remain at 5 per cent during the first half of 2022-23. However, most analysts believe that it would remain at an even higher level.
The GDP growth for the current financial year is pegged at 9.5 per cent. It is projected at 17.2 per cent and 7.8 per cent, during the first and the second quarter of 2022-23, respectively.
Despite low interest rates, credit growth has not picked up to a satisfactory level. It hovers at around 7 per cent, which is too low for the Indian economy. The credit growth is low despite the fact that there has been a huge liquidity overhang in the banking system for more than a year now.
Das would be required to adopt a calibrated liquidity management approach and boost credit growth.
Expressing concern over the low credit growth, Das recently said, “The growth in demand is not keeping up with our expectations as there was a second wave of the pandemic and corporates are in a wait and watch mode.”