“Central Banks are mysterious institutions, the full details of their inner working so arcane that very few outsiders, even Economists fully understand them,” writes Liaquat Ahamed, in his fascinating book, Lords of Finance.
The Reserve Bank of India (RBI), India’s central bank, has been bestowed with intellectual geniuses and economists of global repute as governors in the past. The appointment of Shaktikanta Das as the RBI Governor in 2019 after the untimely exit of Dr Urijit Patel surprised one and many in the academia and economist circles. But his reappointment for the next three years was well-expected and well-deserved.
As far as RBI governors go, Das has been quite an exception for multiple reasons. After 26 years, the governor’s seat was occupied by a person without a Doctorate up his sleeves. The last non-doctorate on the post was S Venkitaramanan, who was succeeded by Dr C Rangarajan in December 1992.
Das, unlike his predecessors, does not have an academic background in Economics or Finance, rather an MA (Hons.) in History. However, he has a vast experience and understanding of economic and financial affairs as a veteran of the Indian Administrative Services, who also served as former Secretary, Department of Revenue and Department of Economic Affairs at the Ministry of Finance, Government of India.
Das also succeeds two RBI governors whose exit from the post was quite controversial. His immediate predecessor, Dr Urjit Patel, resigned in December 2018 due to ‘personal reasons, becoming the first RBI governor to resign in 40 years. Dr Patel’s predecessor, Dr Raghuram Rajan, exited after completing his tenure, under a slew of allegations from the legislative representatives that he was slowing down the economy by not lowering the interest rates, and more of such. Das’ continued tenure with RBI has brought some stability to the rather tumultuous office ever since the NDA government, led by Narendra Modi, came to power.
Das came into office at a time when the country was reeling from the double whammy of demonetisation, followed by the introduction of the GST regime. As the Modi government was struggling under the burden of faltering GST collections, Das tacitly complied with the use of Contingency Reserve as a bail-out instrument for the cash-strapped Modi government. This led to the transfer of a record amount of Rs. 1.76 lakh crore to the Modi government as a bail-out package in 2019.
Das’ tenure is also marked by the highest amount of funds from RBI being transferred to the Central Government.
Printing currency and lowering interest rates are the prime arsenals in the hands of a central banker facing any financial turmoil or economic slowdown. In his three-year stint, Das has adroitly utilized these monetary tools.
In discussion with Outlook Money, Christof Leisinger, Finance and Economics Editor, Neue Zürcher Zeitung, Zurich, Switzerland, said, “Central Banks have responded to virtually every crisis by cutting interest rates and increasing money supply that has prompted a further decline in interest rates. Falling interest rates led to increasing financialization and indebtedness of the global economy, asset price bubbles and virtually a devaluation of the real economy. Nominal growth is artificially inflated and financial assets are exorbitantly high priced.”
The Indian economy shaped during Das’ term with RBI has an uncanny resemblance with Leisinger’s words.
After the breakout of the Covid pandemic, Das followed the monetary recipe of the Federal Reserve and the European Central Bank and started cutting down interest rates. Forestalling the downward spiral of the economy by pressing the levers of the printing press was the only game in town and central bankers across the world performed this function perfectly.
Today the world is swarmed in debt and the balance sheet of all the major central banks have expanded. As per a CLSA report at the end of FY 21, RBI’s balance sheet expanded by Rs 7.29 lakh crore. But during the same period, India’s real GDP shrank by 7.3% to Rs 135 lakh crore, according to data released by the National Statistics Office. These numbers suggest that RBI’s balance sheet expansion was not helping in growing the real economy.
But India’s central bank is relatively in a better position in comparison with developed economies’ central banks like the US Federal Reserve. With approximately $2.9 trillion GDP (Rs 215 lakh crore), the balance sheet expansion of RBI stood at 3.3% of India’s economy, while at the same time the Federal Reserve’s balance sheet expanded by $4.5 trillion in the same period that corresponds to approximately 20% of the US economy.
Das also had great luck because he joined RBI at a time when interest rates across the world were going down. Everybody loves lower rates, and there could be no bigger evidence than the booming financial asset markets of India. Low-interest rates have made Das a darling of equity markets.
But beneath the veneer of boomtown prosperity and buoyant equity markets, cracks have begun to appear in the form of rising income inequality and deep anguish among savers.
Savers used to be the backbone of the Indian economy who fuelled business credits during the more rational times when lowering interest rates were not used as steroids for the economy. And savers are the worst hit in the current low-interest rate regime. Their investment in bank deposits, carefully accumulated after a lifetime of prudence and discipline, are suddenly yielding lesser than inflation.
The middle-class is facing a double whammy of low returns on their hard-earned savings and rising inflation that is hurting their monthly budget. In the backdrop of rising inflation and anguish among savers, how long can Das keep his soft monetary stance is a million-dollar question.