The uncertain waters that await Shaktikanta Das and RBI in 2019

No one, within or outside RBI, would bet that someday Shaktikanta Das could blurt out, 'My name is Shaktikanta... and I do what I do' -- a snotty sound bite that revives memories of Raghuram Rajan addressing a fawning media. No one, likewise, would imagine Das shutting his doors to senior bankers, or blacklisting journalists who were unkind to men who appointed him as RBI governor -- traits that came to be associated with Urjit Patel.Yet there are trails that connect Das to his predecessors -- the flamboyant Rajan and the reclusive Patel, both hardcore economists, unlike Das.Beginner's Luck Das has had beginner’s luck – quite like Rajan, who, hours after taking charge as RBI governor, had come out with a no-brainer scheme to offer higher returns to NRIs on their bank deposits (a step that immediately arrested the rupee’s fall).In Das's case, his predecessor, Patel, was a bitter, reticent man who had isolated himself from the ministry and market to such a point that all that the new governor had to do was simply smile and talk at the Day 1 press conference -- in which journos banned for two years were also let in -- to reassure bankers and traders caught in an environment of warring and mistrust between North Block and Mint Street. Softening oil price and low inflation also made his job a little easier.A student of history innocent of the Samuelson-Balassa effect on inflation and real exchange rate, or the value-at-risk calculations behind RBI’s 'economic capital’, would probably recall the one-liner: A leader is a dealer in hope. Which is what Das brings to RBI -- a whiff of change that could make the Bank more approachable, even less hawkish, as it opens up the clogged lines of communication to the world. What we don’t know -- and that’s where he could remind us of Patel -- is whether he comes with a specific mandate from New Delhi.Patel, it’s widely perceived, was appointed after he had agreed, perhaps grudgingly, to allow demonetisation. Das, the amicable bureaucrat, will have to work amid the suspicion that he's been given the job to pave the way for scooping out 'extra’ reserves from RBI's balance to GoI's books, which the latter could then use to revive banks and cut debts. In fact, even a large interim dividend (of Rs 30,000 crore or more) from RBI to GoI before the 2019 Budget could turn the spotlight on Das. The Odds & Priorities Das steps in at a point when RBI, after a long time, finds itself in the realm of politics -- on the one hand, with the Opposition attacking the Centre’s every move to rejig and 'raid' a meek central bank, while on the other hand, GoI itself having blamed RBI for the surge in bad loans between 2008 and 2014.So what would Das do? Carving out a trillion or two from RBI’s books would be windfall to GoI but bad optics before the polls. Indeed, how smoothly he handles a large fund transfer could be his acid test. Aggressively talking up the market could make RBI come across as a cheerleader. Turning the heat off on errant banks with shoddy governance record would hurt his credibility as a regulator.Years in bureaucracy have trained Das to list his priorities. He began his innings by announcing large open market operations, where RBI would buy bonds from banks to flush the system with liquidity -- probably with the hope that banks would prune bond losses, be encouraged to lend, while lower bond yields would make it easier for struggling finance companies to roll over their borrowings as they once again battle redemption three months later. 67316827 At his first board meeting, Das gently pushed back GoI’s original agenda to convert RBI into a board-managed central bank by stating that the 'RBI governance’ issue needs “more deliberations”. As any RBI-watcher would agree, Das knows that GoI has partly achieved the objective even before he took oath as governor. By coaxing Patel to allow discussion on some of the operational issues in the last two RBI board meetings before his sudden exit, New Delhi has already asserted the importance of the board.But would he primarily focus on keeping the system on an even keel? Or attempt more serious changes? Nine out of ten people would think he would use his patience and goodwill to perform a balancing act: managing anticipations and avoiding shocks and surprises before the elections while staying below the radar. Those who know Das say even if he is given a mandate, he may not risk his own reputation by rushing it through.As one of the most closely tracked public figures, chances are Das may try to influence changes without rocking the boat. While the media tries to figure out his stand on issues such as the NPA provisioning rules, banking supervision, and promoters of private banks, Das may gently signal a shift in the thinking within the monetary policy committee.His Finest Hour? The new governor may not have answers to the counter-questions from some of the hawkish committee members -- as a non-economist, he may not fully grasp the models and technical presentations placed before the committee, and can't make RBI give up inflation targeting or choose a different index to measure inflation without amending the law. But there’s one thing he knows for sure – that there’s something wrong with the inflation forecasting model, flaws that often made RBI’s inflation predictions go haywire (like the current low inflation which the Bank never quite expected).Das may not be alone, as many within RBI may feel the same. Even as they accept ‘inflation targeting’ as a strategy, they believe there is scope to improve the model. It’s a tool that influences RBI’s decision to cut or hike interest rates and change stance on rates and liquidity. Any move to re-examine it would be one of the biggest news for the financial markets.Patel, as RBI deputy governor under Rajan, had played a key role in shaping the inflation targeting strategy for the monetary policy authority. As Patel’s successor, Das may well feel it’s time to finetune it.Bringing about an overnight change in the monetary policy committee's (MPC) thinking won't be easy. Before anyone else, the new governor would have to first persuade his deputy Viral Acharya -- a well-regarded economist with many published works and with the customary inflexibility attached to such accomplishments. But without getting lost in the maze of inflation targeting maths, the affable bureaucrat may set into play the forces of change with an innocuous suggestion to re-look at the model.As a senior official in the finance ministry in 2016, Das regularly took flak as reporters quizzed him every morning on the travails of demonetisation. As the queues for exchanging old currency notes grew longer, Das, perhaps in a moment of desperation, came out with the farcical suggestion to use indelible ink on the fingers of people who were laundering money by repeatedly joining the queue. Left holding the DeMo baby, he was pilloried then -- and reminded now by the media after being named RBI governor.Perhaps, as a civil servant, he had no choice but to execute the Tughlaqesque plan. But, today, he has choice. The 18th floor of the Mint Street tower, with its history, legacy, and credibility, has the elements that can transform people -- change even those who came to change the institution. Having learnt the tack to survive any regime change, and now armed with the power to create money, change interest rates, and sway the rupee, Das can make the next few years his finest -- beginning with his signature on the legal tender that he was once busy banning.

from Economic Times http://bit.ly/2CHyQZq
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