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RBI-GoI friction to ebb; longer-term financial stability a big challenge for new Governor

Success of the new leadership at RBI depends on looking beyond the near-term imperatives of govt.

ET CONTRIBUTORS|
Updated: Dec 12, 2018, 07.57 AM IST
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RBI-GoI friction to subside; but longer-term financial stability a challenge for new Governor

The appointment of Shaktikanta Das as new RBI governor ahead of the crucial Dec 14 board meeting of the central bank signals a stronger government representation on the central bank’s board. With this development, the ongoing friction between RBI and the government is likely to ebb.

It will be interesting to see what position the executive members of RBI, i.e., deputy governors, take on various issues on which the central bank dissented earlier. It is pertinent to note that Das was the key architect of the controversial demonetisation move of the Modi Government, which in my view was the first instance when the state encroached upon RBI’s domain. And importantly, Das will be joining Gurumurthy, another ardent advocate of demonetisation, on the central board of RBI.

Significantly, pending issues such as estimation of RBI’s excess reserves, its sharing with the government for fiscal spending purposes, forbearance for NBFCs and an easing in the regulatory framework for banks subject to the prompt corrective action are likely to see speedy actions. In addition, some of the tight regulatory measures that RBI had implemented in connection with restructured stressed assets, change in leadership and dilution requirements for private banks can also undergo some modifications.

In the sheer momentousness of the change in leadership at RBI lies the context of the weakening in India’s GDP growth, continued stress in the banking sector and the shake-up in the NBFC sector in the wake of the IL&FS fiasco. Clearly, these factors do not bode well for the government’s electoral fortunes that are getting impacted by a variety of issues such as farm sector distress, adverse situation in the MSME sector and a lack of job creation.

Hence, an amenable relationship between the central bank and the government will definitely be made good use of to address the economic dislocation in the foreseeable future.

Experiences over the past 10 years in India have shown that forbearance for the banking sector have not resulted in long-term resolution of stressed assets. The ad-hoc approach adopted by the government in PSU bank management and by RBI in the general management of the sector, as well as their collective decisions to shy away from calling it a systemic and structural problem have resulted in the malaise to fester on even after 10 years of the 2008 Global Financial Crisis. Evidently, the magnitude of stressed assets has amplified significantly over the past five years.

While the enactment of the bankruptcy law has been a significant reform initiated to alleviate the lingering problem, it is pertinent to note that reforms in India have lacked a systematic and expeditious approach that they deserve.

In contrast, the more fitting upfront regulatory reforms adopted by the US in the aftermath of the GFC 2008, the continuous monitoring of the vulnerability indicators since then, and prompt corrective actions on any deviation have now resulted in very robust and comprehensive financial stability conditions for the US financial system. This has been elaborated in the latest speech of Jerome Powell, Chairman of the Federal Reserve.

Hence, the success of the new leadership at RBI will depend on looking beyond the near-term imperatives of the government and etching out a blueprint for long-term financial stability of the Indian banking and financial services space. While an immediate term relaxation in regulatory framework may provide some quick near-term gains, longer-term financial stability will require a much defter handling of things overall.

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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