At the height of Narendra Modi’s 2016 demonetisation experiment, Shaktikanta Das was the Indian civil servant entrusted with defending the disruptive move to a stunned nation. In the following 12 months he lost none of his enthusiasm. “One year of demonetisation. Significant gains for the economy. Great memories of this day last year,” he wrote on Twitter.
This week Mr Das was rewarded for his loyalty to the prime minister with the Reserve Bank of India governorship. His appointment followed Monday’s abrupt resignation of Urjit Patel, who was ousted after a bitter stand-off with New Delhi over his efforts to clean up the banking system and his refusal to give the government more of the RBI’s reserves.
Now Mr Das has the difficult task of balancing Mr Modi’s desire to kick-start a faltering economy ahead of next year’s general election with maintaining macroeconomic stability. Analysts said investors were waiting to see whether the RBI would remain independent and credible or become more willing to do the prime minister’s bidding.
“Mr Modi is a driven politician who wants to do whatever it takes to win the election,” said Saurabh Mukherjea, founder of Marcellus Investment Management. “The RBI’s job is not to win the election. It is to keep the economy healthy. Shaktikanta Das will have to see if he can reconcile — to some extent — these two differing motives.”
At the RBI a day after his appointment, the 61-year-old Mr Das sought to reassure investors. “I will try and uphold the professionalism, the core values, the credibility and the autonomy of the Reserve Bank as an institution,” he said.
But he also stressed he would give the government, and India’s influential business community, a greater hearing — in contrast to Mr Patel, who was criticised for ignoring New Delhi.
Fitch Ratings responded by warning that “increased central government influence on the central bank” posed “risks to the RBI’s policy priorities.”
For decades, the RBI was run by low-profile bureaucrats susceptible to political pressure from New Delhi, which was reflected in India’s persistently high inflation and the poor health of state-owned banks.
But in 2013 the then ruling Congress government, stung by galloping inflation, installed Raghuram Rajan, a former IMF chief economist, to shake up the institution.
Since then, Mr Rajan and Mr Patel have raised the RBI’s stature and restored investor confidence in India’s macroeconomic stability. They tamed India’s persistently high inflation and also launched an aggressive clean-up of state banks’ books.
Initially, Mr Modi deferred to the RBI. But with elections looming, he has grown more receptive to business complaints that state banks have been too strict in their lending. Mr Patel had resisted pressure from New Delhi to ease lending restrictions by state banks with high levels of bad debt, but analysts believe Mr Das will be easier to persuade.
“There was an established nexus between industrial houses, public sector banks and New Delhi,” said Mr Mukherjea. “Rajan and Patel turned the screws and tried to break that construct. Now it’s up to Shakti Das to see if he wants to carry the fight forward or fall in the line of a more conventional RBI.”
“My reckoning is there will be rollbacks, but a lot of it will be done quietly,” he added.
The Confederation of Indian Industry welcomed Mr Das’s appointment as a “huge sentiment booster to industry”, and expressed confidence in “a seamless flow of credit to industry and trade”.
Along with demands for greater access to credit for business — including for India’s shadow banking system— Mr Das will also confront the Modi government’s demand for more of the RBI’s “excess reserves”, so it can step up pre-election spending without overshooting its fiscal deficit target.
New Delhi’s hunger for the RBI’s funds is likely to have intensified after this week’s state elections, when the opposition Congress made big gains in the BJP’s Hindi-speaking strongholds.
Economists say an independent central bank should set its own level of required reserves, which are crucial to protecting India from external shocks. While Mr Das has not yet expressed his own views on reserves, they are likely to become clear soon, given that elections must be completed by May.
“India has a long history of bureaucrats who appeared supine suddenly discovering their backbone when they are appointed to become independent regulators,” said Mihir Sharma, a senior fellow at the Observer Research Foundation, a think-tank. “But that is not an overnight process. I don’t think there is enough time between now and elections for Mr Das to get out of the habit of obeying the finance ministry.”
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