Indian government reappoints Das as governor

The Indian government renewed Shaktikanta Das’s term as governor of the Reserve Bank of India today (October 29), giving him three more years at the head of the central bank.

The decision hints at the government’s confidence in Das’s leadership style. It comes after a period in which the RBI conducted extraordinary operations in support of the economy and acted to underpin the government’s major borrowing programme.

The RBI confirmed the reappointment in a short statement, saying the central board congratulated Das at its meeting today.

Das’s original appointment in December 2018 marked a return to the previously traditional practice of appointing career civil servants to lead India’s central bank. He has since brought the RBI back into a closer relationship with the Hindu nationalist government of Narendra Modi.

Das’s predecessors in the role, Urjit Patel and Raghuram Rajan, both clashed with politicians over efforts to clean up the banking sector. Patel resigned from his post after just over two years as governor, while the government did not appoint Rajan to a second term.

Although he has taken a more conciliatory line with the government, Das has continued much of the work that Patel and Rajan began. He oversaw the first use of India’s revised bankruptcy code to put a non-bank into insolvency proceedings. The governor also told banks to raise capital and improve their governance, as well as launching a new college of supervisors to improve the RBI’s oversight of the sector.

The Covid-19 pandemic appears to have set back the banking sector clean-up. The RBI offered banks regulatory forbearance and supplied generous liquidity. A feared surge in non-performing assets (NPAs) did not materialise, but NPA ratios are still expected to rise in the coming months, and public sector banks remain a particular area of concern.

As in many countries worldwide, Covid-19 led the RBI to provide more direct support for government policy. As the pandemic took hold, the central bank slashed its policy rate to the current record low of 4%. It also experimented with asset purchases, which have curbed yields and helped the government maintain heavy borrowing.

Earlier this year, the RBI faced a deteriorating outlook. Inflation surged to 6.3% in May, outside the target band, and the economy slowed amid rising Covid cases.

However, forecasts have since improved. Favourable harvests helped to bring inflation down to 4.4% in August, close to the 4% target.

The RBI expects the economy to recover this year and rebound to a growth rate of 17.2% in the first quarter of the 2022–23 fiscal year, which begins in April 2022.

“With the worst of the second wave behind us and substantial pick-up in Covid-19 vaccination giving greater confidence to open up and normalise economic activity, the recovery of the Indian economy is gaining traction,” Das told journalists on October 8.

While he said policy-makers would retain their “accommodative stance”, he also hinted it would soon be time to gradually withdraw extraordinary liquidity support, “to preserve financial stability”.

Public sector banks are likely to remain a major focus in Das’s second term. At 9.5%, their gross non-performing loan ratio is much higher than the 4.8% average among private banks. The government has indicated it will legislate to allow privatisation, which could help address the banks’ chronic weakness.