Just reward

The government has done well to grant Reserve Bank of India (RBI) Governor Shaktikanta Das a three-year extension of his term. Having moved into the hot seat when relations between the central bank and the Finance Ministry were at a flash point, Das has done much more than restore this relationship to an even keel — he has adroitly managed the tricky balance between growth, inflation and exchange rates during a very difficult period. RBI, under his stewardship, has led from the front doing the heavy lifting for the government as the economy took a pounding from the pandemic. Whether it was maintaining low rates and an accommodative stance for an extended period, reaching credit to needy sectors through unconventional tools, extending regulatory forbearance to small borrowers during the worst of the crisis or managing market yields through G-SAPs, RBI’s proactive interventions kept the economy’s growth impulses alive during Covid, allowing the Centre to make fewer fiscal interventions. Under Das, RBI has also been able to shed its image as an ivory-tower-regulator, with wide stakeholder consultations helping it usher in a tighter regulatory dispensation for housing finance companies, co-operative banks and NBFCs without much ado.

If the deft way that Das handled the impact of the pandemic defined his first term, the second one will be defined by how well he’s able to undo the measures he initiated in the last three years to support the economy. It was easy for the government and the RBI to be on the same page when their objective was the same — support the economy through lower rates and increased liquidity. The real challenge will come now when the objectives start to diverge — the central bank’s focus will now shift to inflation management which means a rise in interest rates and draining of liquidity, something that will run counter to the government’s objective of supporting growth by keeping rates low and maintaining an accommodative stance. This is when relations between Mint Street and North Block will be tested. Of course, Das has the advantage, unlike his two immediate predecessors, of having been on the other side which means he will be able to appreciate the pressures from the government. But the balance will surely be tested.

RBI also has its work cut out as a financial regulator. It needs to take the contentious call on issuing banking licences to industrial houses, per recommendations of its internal working group. Along with the government, it will soon need to bell the cat on checking the untrammelled growth in crypto-currencies. The same holds good for burgeoning fintech providers, which are now becoming an unregulated front-end for banks and NBFCs to dabble in unsecured loans and pitch risky products to unwary investors. Already criticised for ineffectual supervision of banks, RBI needs to build capacity to extend this oversight to NBFCs and co-operative banks. Clearly, Das’s second term will call for even more adept helmsmanship than his turbulent first one.

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