Shaktikanta Das started his sleeves at the Reserve Bank of India in 2018 with a crisis in hand. A debate raged on the autonomy of the central bank and its capital framework. His predecessor Urjit Patel abruptly resigned – allegedly due to disputes with the government – and his successor had to replace him quickly. Since then, Das has faced many crises: the liquidity shortage in non-bank financial corporations, the downturn in the economy and the coronavirus pandemic.

He handled the impact of the pandemic well, reacting quickly by sharply cutting interest rates and taking many other steps, central bank observers say.

Now that the economy is back to normal, a different challenge faces the former public servant. Here are six priorities for Das, 64, as he begins his second term after the extended government on Friday gave him three more years in office. He will be the first governor in seven decades to serve such a long tenure at the Reserve Bank (RBI) when he completes his second term.

Boost credit growth

Growth in bank credit, one of the key indicators of economic activity, remains subdued. According to central bank data, commercial bank lending has increased 0.6% in the year so far; year-on-year growth is 6.5%.

“The revival of the credit market could be one of his priorities,” said Sachin Chatuverdi, director general of the Research and Information System for Developing Countries (RIS), and member of the central council of the RBI.

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“Because there is enormous liquidity in the market, all banks are sat on liquidity. How can we move this forward? This could be a priority for the governor, ”Chaturvedi told Business Standard. Isolating the Indian economy from global fallout would be another priority, he said. Improving banking services in semi-urban and rural areas could be another task.

Empty excess cash

For over a year, there has been a huge excess of liquidity in the banking system. Daily net liquidity absorption under the Liquidity Adjustment Facility (LAF) averaged Rs 7.8 trillion in the second half of September to October (through October 13), against 8,900 billion rupees during the first half of September.

A similar liquidity situation also arose after the 2016 demonetization exercise. The withdrawal of liquidity resulted in a massive liquidity shortage for non-bank financial corporations. As a result, the central bank is this time extremely cautious about withdrawing excess liquidity.


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“Bringing liquidity back to normal levels is a big challenge,” said Abheek Barua, chief economist, HDFC Bank. “You can very easily inject money into the system, but getting out of it is a very difficult task without causing serious disruption in the market,” Barua said.

Return to an inflation target of 4%

The pandemic had forced the central bank to target inflation in the 2-6% range. The inflation targeting framework requires the central bank to target 4% inflation with a 2% change on both sides. With the revival of growth being a priority, the central bank has accepted a wider tolerance zone than it would have normally done.

Returning to policymaking in normal times now will be a priority for the central bank. Market participants said that although the process of liquidity normalization has started, the shift to normalization of monetary policy from an ultra-accommodative position, could begin as early as the start of the December policy with an increase the reverse repurchase agreement rate. The repo rate has been reduced more than the repo rate since the onset of the pandemic, resulting in the corridor widening to 65bp from 25bp. (100 basis points = 1 percentage point).

“We continue to expect the RBI to maintain a relatively accommodative stance while focusing on growth under a more flexible inflation targeting regime that evolved under Governor Das. This was a change from the MPC’s approach under former Governor Urjit Patel, which was characterized by a commitment to stick to the midpoint of the 2-6% target range, ”said Barclays economists said, referring to the monetary policy committee.

“Overall, we continue to expect the repo rate to be raised at the December policy meeting, the last of Governor Das’ first term, but the repo rate will likely not be raised. than by Q2-22, when we believe the RBI will look at economic recoveries as sustainable, ”Barclays said.

Barua of HDFC Bank also says the challenge of growth is still there. “We are still considerably short of the pre-pandemic trend growth trajectory. We cannot therefore do everything we can to manage inflation, especially when inflation is supply-driven. “

Change rate

Faced with massive inflows, managing the exchange rate to maintain the competitiveness of Indian exports is another priority area for the central bank. In the forex market, the Indian rupee appreciated against the US dollar in September 2021 by 0.8% (mo) on strong REIT inflows. This was reflected in the movement of the rupee in terms of the real effective exchange rate index (REER) to 40 currencies, which appreciated 0.7% from its level a year ago. month. Although there was downward pressure on the rupee in mid-October, the rupee once again started to gain ground.

“If India is indeed such an attractive market, with all the IPOs coming in, then we can see a situation like 2004 where the rupee has appreciated very strongly. How do you handle this? I think this is a very big challenge for the governor, ”said Barua.

PMC Bank Resolution

The central bank is to manage the merger of troubled lender Punjab & Maharashtra Cooperative Bank (PMC) with Unity Small Finance Bank, which is a joint venture of Centrum Financial and Bharat Pe. He has experience in this task saving YES Bank and Lakshmi Vilas Bank.

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The merger of the two entities is probably in the final phase, which will take place as soon as the proposed merger is notified by the government. Ensuring a smooth transition for PMC depositors who have been struggling for more than two years to Unity will likely be one of Das’ immediate priorities.

Business banking license

An internal RBI task force has proposed granting a banking license to the corporate sector. While the central bank has yet to take an appeal on the matter, India Inc believes the government allowing private banks to undertake operations (which was only allowed for public sector banks) is an indication things to come. Sooner or later Das must take a stand on this issue.