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India's central banker faces an increasingly tough balancing act

Mr Das has paid a hefty dividend to the finance ministry, swung into stimulus mode and eased up on bank lending restrictions.


SOON after taking over as India's central bank governor almost a year ago, Shaktikanta Das decorated his 18th floor office overlooking the Arabian Sea with two statues of Lord Jagannath, a form of the Hindu god Vishnu. Revered in Mr Das's native Odisha state, Jagannath is depicted with round, lidless eyes that are always watching over the welfare of devotees. It's an appropriate adornment.

Mr Das, overseeing what was until recently the world's fastest-growing major economy, has worked tirelessly to restore relations with the government after a bitter public spat led his predecessor Urjit Patel to quit.

Mr Das has paid a hefty dividend to the finance ministry, swung into stimulus mode and eased up on bank lending restrictions - all of which Mr Patel resisted in the face of government pressure.

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But there's still much to do: the economy is losing steam on many fronts, the banking sector remains saddled with one of the world's worst bad-debt loads and the government's fiscal targets are slipping by the day.

Insiders say Mr Das has turned around the mood in the bank's Mumbai headquarters with an affable, plain-spoken approach. As one official said: he listens to everyone and then sticks to his own decision.

Among the RBI rank and file, the more academically-decorated predecessors of Mr Patel and Raghuram Rajan were considered outsiders due to their long stints in American academia. Long-timers were put offside as in-house talent was often bypassed in senior appointments.

Not with Mr Das: in the job posting for a deputy in-charge of monetary policy, at least 25 years of government experience within India tops the priority list among requirements for the role. Mr Rajan and Mr Patel were contrasting personalities - Mr Rajan the rock star of global central banking and Mr Patel reclusive both inside and outside the bank. The silver-haired Mr Das strikes a balance. He has his own Twitter account and is more open to the media. But he hasn't taken to the global stage in the way Mr Rajan did.

Mr Das's communication skills have helped improve the relationship with the government. The two sides no longer spar in public and instead resolve issues internally, finance ministry officials said.

A recent example being the central bank's reservations toward the finance ministry's proposal for what would have been India's first overseas sovereign bond issue. The proposal, which also met with opposition from within Prime Minister Narendra Modi's own party, has been frozen.

The Reserve Bank of India (RBI) has an out-sized role in the nation's economy, making central bank-government friction a feature of policy making in the nation.

Mr Das is responsible for monetary policy, an exchange rate that's near historic lows, supervising banks that carry one of the world's biggest bad-debt loads, and selling bonds the government relies on to fund its yawning deficits. Most major central banks have only one or two of those duties.

It was a battle over independence that led to Mr Patel's early departure on Dec 10. The introverted Yale University-trained economist had sought to continue his predecessor Rajan's efforts to clean up the nation's financial sector by tightening wasteful lending by state banks and was keen to keep the RBI's balance sheet as robust as possible in case of crisis. But as the economy slowed through 2018 and with a general election looming, Mr Modi's government pressed the RBI to loosen up lending restrictions to boost growth and to transfer surplus funds at the central bank.

Mr Das, appointed on Dec 11 for a three-year term, set about changing course almost immediately. In one of his first decisions announced in early January, he instructed banks to restructure stressed loans given to small and medium-scale enterprises, thus breaking from a five-year-old policy of eschewing corporate debt overhauls. That was quickly followed up by lifting lending restrictions on three state-run banks.

In February, in his first meeting of the six-member monetary policy committee (MPC) that he chairs, Mr Das along with three other members voted for a 25 basis point interest-rate cut. And in a sharp reversal from October last year, when the MPC led by Mr Patel had taken rate cuts off the table, Mr Das opened the door for more reductions and said reviving growth was the main priority of the inflation-targeting central bank. He's cut five times this year, by a cumulative 135 basis points.

A test of Mr Das's ability to keep the government onside now presents itself given inflation has climbed back above the central bank's medium-term target of 4 per cent. The consumer price index bottomed out at 2 per cent in January and was 4.6 per cent in October. Despite the price revival, economists expect Mr Das to stay in easing mode, and see the benchmark interest rate falling to 4.9 per cent by the end of March 2020.

Mr Das also heeded the government's call for higher dividends, paying a record US$24 billion to government coffers in August. But the RBI's pockets aren't infinite and at some stage in the future Mr Das may have to stare down any further requests for bumper payouts.

Mr Das is also in-charge of the exchange rate, and its management has in the past angered government officials and the export lobby, which complain about the rupee's competitiveness. Mr Das, like Mr Patel, has reiterated the oft-repeated central bank approach that India's exchange rate is market-driven and the RBI has no target in mind.

It's the RBI's role as regulator of the country's banking system that creates the most potential for conflict with the government, because about 60 per cent of the business is controlled by state-run banks. They are owned by the government and the RBI has limited supervision and legal powers to bring about changes in management to these banks, unlike the privately-owned ones where it holds more sway. That creates an uneven playing field leading to question marks over the efficacy of the RBI's independence in regulating banks.

Mr Patel's RBI was criticised for keeping financial conditions tight and failing to detect lapses in shadow lenders and banks on time. A large shadow bank failed last year, an event that triggered a chain of defaults in the financial sector and saw shadow banks withdraw from the lending space. Consumption took a beating as hundreds of millions of poorer Indians rely on shadow finance, dragging economic growth to a six-year low of 5 per cent. Mr Das has assured investors that another large-scale collapse won't be allowed in the shadow-banking sector. The RBI has asked for greater powers over the so-called non-bank finance companies, something the government has granted.

What really sets the RBI apart from many of its counterparts is its role as the investment banker to the government. That creates potential for priorities in one realm to influence other areas of its mandate. For instance, the RBI may be encouraged to keep interest rates low to help manage the government's borrowing, even though inflation targets might come under threat, risking macro-economic and financial stability.

Under Mr Patel, the central bank bought a bulk of the federal government's borrowing requirements. Under Mr Das, the borrowing programme has proceeded without much of a hitch so far.

Mr Das has so far managed to juggle these multiple and often conflicting roles. But as the economy slows, bad debt piles up and the budget deficit target goes out the window, it'll be a tough act to keep all the balls in the air. BLOOMBERG