New Delhi: Beating widespread speculations that Shaktikanta Das will get an unprecedented third term as the Reserve Bank of India (RBI) governor, the Union government appointed revenue secretary Sanjay Malhotra to take over his position early this week.
Tilting the scales in his favour, sources in the Indian bureaucracy told The Morning Context, is his proximity with Union finance minister Nirmala Sitharaman that may enable the government to have a greater say in RBI’s policy making in the future.
The Morning Context reported that the government viewed Das’s leadership as inadequate to stop the fall in India’s GDP figures. “The government is of the view that the fall in GDP numbers merited a huge cut of 75 to 100 basis points. It believes the RBI’s prudence has been holding back growth,” it quoted a source as saying.
Despite his wide-ranging experience over the last three decades, Malhotra’s term at the helm of India’s central bank will come with a series of challenges to stem plummeting growth rates. The 1990-batch Rajasthan cadre IAS officer, Malhotra, has experience working in several significant sectors, including financial services, power, taxation and information technology.
He replaced Debasis Panda as the secretary of the department of financial services under Sitharaman in February 2022, where he closely watched the banking sector. In December, 2022, he was appointed as revenue secretary, where he oversaw noticeable growth in financing power projects by Rural Electrification Corporation Limited, a public sector Maharatna company.
However, there are a range of macro-factors underlying Das’s departure and Malhotra’s appointment. The government is currently struggling to boost consumption in the Indian economy. Industrialists like Mohandas Pai have been accusing the RBI of a slowdown by refusing to cut interest rates, even while the RBI’s Monetary Policy Committee (MPC) has insisted against such a move to contain inflation, that is “above target” in the books. Any interest rate cuts would further squeeze people who are suffering from back-breaking price rise.
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However, the RBI panel under Das in the last few months has resisted pressure from the industries to cut interest rates. Resultantly, the growth rates have registered significant slowdown. Sluggish manufacturing and strained consumption have become a cause for long-term worry for both the commerce and finance ministers.
“On November 29, it was announced that India’s GDP growth had slowed to a seven-quarter low of 5.4% in the September quarter of the ongoing fiscal – way below the 6.5% predicted by a Reuters poll. What was to blame for the poor show? An industrial slowdown and moderation in investment demand. In particular, the September quarter saw growth in mining turning negative and manufacturing growth slowing to 2.2% from 14.3% in the year-ago period,” The Morning Context reported.
Compounding the slowdown was also the reduced government spending during the recent assembly elections in the first two quarters of the current fiscal.
Even as many were hoping for a possible rate cut on December 6 at the MPC meeting, or at least the RBI showing strong intent of doing so, the RBI panel did not indulge in any such signalling.
The government is stuck between a rock and a hard place, having to choose between political optics and economic logic. Malhotra’s appointment indicates that it needed to do some positive signalling to industrial lobbies, even when it is in line with RBI’s resistance to any rate cut that may put them out of political favour among people.
Until recently, Das’s six-year tenure at RBI was credited for setting the banking sector in order and navigating the challenges caused by COVID-19 pandemic and Russia-Ukraine war successfully. Although the RBI did not cut interest rates, Das still attempted to infuse some energy in the banking sector by cutting the cash reserve ratio (CRR) by 50 basis points to 4%. The move is expected to reduce short-term interest rates and pump around Rs 1.16 lakh crore into the banking system.
“Several experts see this as sensible since the CRR cut would better prepare the market for future benchmark rate cuts,” The Morning Context said.
However, with the RBI’s recent moves to make financing infrastructure projects stricter by implementing new guidelines, the government’s intention to unburden itself just became more difficult than before. At the same time, the RBI wanted to put in place a new framework for expected credit loss (ECL) by the end of the current fiscal year that would require banks to report bad loans much earlier than the present arrangement.
“This apprehension prompted the RBI to increase risk weights on unsecured loans in order to curb runway growth in lending,” The Morning Context said, adding that “this change in reporting bad loans would also mean more provisioning by banks – and a strong possibility of capital erosion.” Given the fact that the government’s stakes in the banking sector are quite high as it promotes 12 public sector banks, it is in a bind.
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“The capital erosion would mean that the government would have to go for recapitalisation. There is a strong possibility of this happening. That is why the government wants to delay. But the RBI wanted to implement it at the earliest,” a source told The Morning Context.
“Now, a recapitalisation at this stage would impair the budget, dent the go-go narrative of the government and may also be bad optics. Recall that the over Rs 2 lakh crore recapitalisation implemented in 2017 continues to draw jabs from critics that it was nothing but a massive subsidy for large defaulters,” said the news portal.
Against such a backdrop, Malhotra’s appointment may be just a way for the government to provide better optics than what Das’s term entailed for the industry, but it also raises the all important question of the central bank’s institutional autonomy.
“Das has now joined former RBI governors Raghuram Rajan and Urijit Patel in paying the price for not toeing the line. This debate comes at a time when the economy is delicately poised between arguments of systemic slowdowns and temporary blips. Under Das, there was no visibility of rate cuts starting February 2025. Markets, businesses and growth junkies may now get their wish under a new governor,” averred The Morning Context.
