Reserve Bank of India Governor Shaktikanta Das has successfully helmed the central bank through several challenges — including turning around the banking sector from its non-performing assets crisis and steering it through the pandemic. But now he’s up against a new challenge, something he hasn’t encountered before in his tenure: a strong pushback against his policies from the government of India.
Tussles between the central bank and the Ministry of Finance aren’t new, going back to the RBI’s second governor in Independent India, Benegal Rama Rau, and his widely-publicised spats with then Finance Minister TT Krishnamachari. Over the years, such tussles have made the news time and time again.
Das, however, has so far kept his head down and his nose clean. Despite having a term longer than most RBI governors, there’s not been an inkling of any disagreements he’s had with the Finance Ministry, at least until now.
The next few weeks — incidentally the last of his current tenure as governor, rumours notwithstanding — will see how successfully he can navigate the latest butting of heads between the government and the RBI.
Will he retain his independence and hold his ground by leaving interest rates unchanged, as he has strongly hinted he will do? Or will he bow before government pressure—which is ramping up—and cut rates?
Problematically, cutting rates would certainly help the economy, but would now be seen as weakness on the governor’s part. Keeping rates unchanged would display strength, but it’s questionable if it would be the right move for the economy.
Inflation and interest rates
The latest reason for the RBI and government to make their contrasting views public has been the vexatious issue of inflation and its relation to central bank interest rates. Things haven’t yet become as acerbic or sensational as such tussles have in the past, but the situation is nevertheless significant.
After raising rates in stages to 6.5 per cent in the wake of the pandemic, the RBI’s Monetary Policy Committee (MPC) in October this year decided to keep rates high and unchanged for the 10th consecutive time. It did, however, change its stance to ‘neutral’, indicating that it was more ready to cut rates in the future.
While this change in stance was seen as a signal that the MPC could cut rates as soon as December—when it meets next—the RBI governor and other senior officials have put paid to that notion. “A change in stance doesn’t mean there will be a rate cut in the very next monetary policy meeting,” Das said at a summit earlier this month. It’s tough to get more categorical than that.
With October’s retail inflation coming in at 6.2 per cent — higher than the RBI’s upper comfort bound of 6 per cent — it might seem that, on the face of it, the MPC was right in not cutting rates. The problem is that most of this inflation was driven by vegetable price inflation, something the central bank has no control over.
While several economists have made this point, the matter escalated when the government adopted the same position.
About a week after Das made his statement, Minister of Commerce and Industry Piyush Goyal raised the issue in an equally unequivocal way. “Food inflation has nothing to do with managing inflation,” Goyal said, adding that he believed the RBI should cut interest rates. This was the first time since Das took over that a Union minister had spoken about this.
A few days later, Finance Minister Nirmala Sitharaman too added her voice to the debate, saying that bank interest rates would have to be “far more affordable” to fuel India’s growth ambitions.
The jitters on the part of the government stem from the fact that nearly all indicators of growth are pointing toward a slowdown. The expectation is that the second quarter GDP growth numbers, to be released at the end of this month, will come in at about 6.5 per cent. This would not only be slower than what had earlier been predicted for the quarter, but also slower than the 6.7 per cent growth seen in Q1. And even that 6.7 per cent was an unpleasant surprise.
Despite this, Das and the RBI have stuck to their guns so far. The governor has been focusing on price stability in subsequent speeches. The RBI’s latest State of the Economy report said October’s high inflation vindicated the central bank’s warnings against “complacency” due to inflation coming lower than 6 per cent in July and August.
Also read: Indian investors don’t need a coddling nanny. Let them make mistakes and learn
RBI vs GOI
But the thing is, in nearly every past disagreement between the government and the RBI, it’s been the government that has come out on top. When Benegal Rama Rau locked horns with TT Krishnamachari over the finance ministry apparently stepping into the RBI’s domain, it was Rau who resigned in a huff.
More recently, it was Raghuram Rajan who quit as RBI governor — despite his rockstar image — when push came to shove between him and former Finance Minister Arun Jaitley over things like demonetisation and Rajan’s outspokenness.
Though Rajan later said he had told the government he was against demonetisation, as we all know, the government went right ahead with it under his successor Urjit Patel. That is, the government got its way.
Similarly, it was Deputy Governor Viral Acharya who resigned after his headline-grabbing comments about the government impinging on the RBI’s autonomy by, among various things, asking for large dividends. Compounding the RBI’s loss in this argument is the fact that it transferred a record-breaking Rs 2.1 lakh crore of dividends to the government in 2023-24. This has effectively ended any debate on what should happen to the RBI’s dividends.
Simultaneously, RBI governor Urjit Patel was having his own tussle with the government over the prompt corrective action (PCA) framework for banks. Basically, the government said the norms were too strict and were hurting banks that were already ailing, while the RBI said the strictness was necessary for the health of the banking system.
Patel resigned even before his three-year tenure ended, citing “personal reasons”.
Shaktikanta Das took over as RBI governor in December 2018. Rather than fight the government over the PCA framework, he instead focussed on improving the health of the banks within the framework. As a result, by 2023, restrictions were lifted on all the banks on which the PCA framework had been imposed.
Das was also a ready and willing ally to the government during the COVID-19 pandemic, increasing liquidity in the system when it was needed and facilitating the various credit guarantee schemes that the government implemented.
It, of course, helped that he was a secretary in the Ministry of Finance before becoming RBI governor. He knows how the ministry works and how to get things done in government without creating a ruckus.
However, there’s no getting around the fact that, if he does cut rates in December, it will look like he is bowing to government pressure. Even though various economists have called for the delinking of food inflation from the overall inflation-targetting framework, Das and the RBI have stood firm. Food inflation is an integral part of inflation-targetting and cannot be ignored, they have argued.
It’s also not as if the Q2 GDP numbers will come as a surprise to the RBI. It maintains a very close watch over nearly all high-frequency indicators of the economy. So, one can’t even argue that a rate cut — if it comes — was necessitated by the poor growth numbers. If growth was a big enough concern, the governor would have said as much. He’s been quite transparent like that. Similarly, even if November inflation eases, Das would be inconsistent if he allowed a single month’s data to sway his decision.
In a nutshell, even if Das does the right thing and cuts rates, it’s going to look like he did so only because the government asked him to. An unfortunate blip in an otherwise stellar tenure as a strong governor.
TCA Sharad Raghavan is Deputy Editor – Economy at ThePrint. He tweets @SharadRaghavan. Views are personal.
(Edited by Ratan Priya)
Das is success story for Generalists. They have been often criticised for lack of expertise but Das has shown how having a career bureaucrat at top position can navigate tough waters which specialist can’t because of certain principles and ideology they come up with.