In His First Speech, Shaktikanta Das Stresses On Need To Maintain Macroeconomic Stability

Reserve Bank of India governor Shaktikanta Das, in his first speech since taking over, chose to stress on the need to preserve domestic macroeconomic and financial stability. The comments, coming at a time when there is a clamor for looser fiscal and monetary policy, will reassure bond investors who fear that short term fixes to structural problems could destabilise the economy.

“The foremost priority is to preserve domestic macroeconomic and financial stability, especially in a global environment that is clouded by high uncertainty,” said Das while speaking at the Vibrant Gujarat Summit on Friday. Highlighting persisting global uncertainties, Das said that the “domestic macroeconomic policy framework needs to be supported by sound financial supervision and regulation.”

Joining The Inflation Debate

While balancing his comments between the need to keep inflation in check and supporting growth, Das weighed in on the ongoing debate over high core inflation and low headline inflation.

“Although headline inflation has moderated significantly in recent years, as discussed earlier, its major components – inflation in food, fuel, and inflation excluding food and fuel – are exhibiting wide divergences this year,” Das said. He added that while food inflation has turned negative since October 2018, inflation excluding food and fuel remains sticky at close to 6 percent.

Das, however, tempered his seemingly hawkish comments by suggesting that growth would remain on the Monetary Policy Committee’s radar. “We will take necessary steps to maintain financial stability and to facilitate enabling conditions for sustainable and robust growth.”

The MPC will meet next month to review policy for the last time this fiscal year. With inflation falling to 2.19 percent in December, a number of economists expect a change in the monetary policy stance in February and an eventual move towards interest rate cuts.

Corporate Governance In Banks

Commenting on the ongoing clean-up in the banking system, Das highlighted that significant progress has been made under the insolvency regime. According to Das, data available till Jan. 3, 2019 suggests that the resolution plans have been approved in 66 cases, involving around Rs 80,000 crore as resolution value to creditors.

While the bad loan clean-up continues, Das said that it is important to strengthen corporate governance systems in banks.

However, here too, Das balanced out his comments saying that the regulatory approach would be one in which banks continue to play a “positive” intermediation role in the economy.

“The regulatory approach of RBI has been and will be aimed at ensuring that the banking system withstands the transitory difficult phase and keeps playing a positive intermediation role in supplementing the financial needs of our growing economy,” Das said.

Tighter Rules For NBFCs

Das reiterated that the RBI is working on tighter asset-liability rules for non bank financial companies (NBFCs). Referring to the fall of Infrastructure Leasing and Financial Services, Das said that the incident had highlighted the need to strengthen the regulatory vigil over the sector.

Das highlighted that a number of steps have already been taken to ease the pressure on the NBFC sector. This includes easier securitisation rules and the decision to allow partial credit enhancement of NBFC bonds. “We are keen to foster a well regulated, well-functioning and vibrant NBFC sector,” said Das.

Challenges Ahead

Concluding his speech, Das counted the challenges that he thinks are confronting the Indian economy at the current juncture.

Top of the list was inflation. “Balancing the objectives of inflation and growth under a flexible inflation targeting framework would warrant careful analysis of every new data,” Das said after flagging off the divergence between core inflation and headline inflation.

The need for continued vigil on asset quality of banks was second on Das’ list. “It will remain critical to ensure that further slippages are contained,” he said. Das added that an improved corporate governance framework with a focus on “transparency and accountability is needed.” Addressing emerging cyber security risks is also a challenge, said the governor.

Finally, Das went on to highlight the need to watch the external sector. “While positive policy settings and continued macroeconomic stability helped contain India’s external vulnerabilities, a close monitoring of external sector is required,” he said.