Shaktikanta Das, who oversaw demonetisation, is new RBI governor

New Delhi/Mumbai: The government on Tuesday appointed Shaktikanta Das, member of the fifteenth finance commission, as the governor of the Reserve Bank of India (RBI), a day after Urjit Patel resigned at the end of a bruising tussle with the government over the regulator’s independence and the regulation of banks.

Das, who was secretary in the department of economic affairs when Prime Minister Narendra Modi announced the controversial high-value currency ban in November 2016, has the immediate task of normalizing RBI’s relations with the government and reassuring the financial markets about the direction of the central bank’s policies. The last thing the government wants at this juncture is a sell-off in the rupee, after having taken a series of fiscal measures, including raising import tariffs on certain goods, to try and arrest the domestic currency’s recent depreciation. The rupee ended 53 paise lower at 71.87 against the US dollar on Tuesday, recovering from an intraday fall of 110 paise.

The appointments committee of the cabinet cleared Das’s appointment for a period of three years, said an official order issued by the department of personnel and training.

Another key challenge for Das is to win over the support of RBI executives, especially deputy governor Viral Acharya, who may still be smarting from government interference and Patel’s exit.

Patel’s predecessor, Raghuram Rajan’s term, too, was tumultuous, with the government and RBI failing to see eye to eye on issues such as managing liquidity and regulation of weak banks. The Modi administration, which believes RBI is not doing enough to ease the liquidity crunch faced by non-bank lenders or to ease lending curbs on banks to finance new projects, has made its displeasure abundantly clear.

Rajat Kathuria, director and chief executive of the Indian Council for Research on International Economic Relations, said the uncertainty that hit the central bank with the shock resignation of Patel was only temporary. He said the direction of RBI’s policies in tackling toxic assets in the banking system is expected to continue. The Modi administration, which is keen to boost access to finance, especially for small businesses, has been keen to ease the lending curbs on about a dozen weak banks. “The economy needs the banking system to be resilient,” Kathuria said. “The RBI has been working on it. That will continue. There is no other way.”

Das, who will preside over the next board meeting of RBI on Friday, will have to decide on some of the thorny issues. At the last board meeting on 19 November, RBI made some concessions on capital adequacy of banks but decided to refer proposals relating to the transfer of surplus capital to the government and easing lending curbs on weak banks to certain committees.

Despite RBI being known to mould individuals to rise above their allegiances, it is to be seen if Das will succeed in striking a balance between achieving the government’s objectives in a pre-election period and protecting the central bank’s operational freedom. Das joins the central bank at a time when India’s growth has been slowing down, the currency markets are volatile and crude oil prices are set to be less benign, following a production cut by the Organisation of the Petroleum Exporting Countries.

Despite pressure from the government and the industry, the central bank has so far stuck to its position on the much-debated 12 February circular that introduced the one-day default norms. Banks will now be closely watching if the regulator relaxes its stand on the issue following the change of guard. Das will also have to rework RBI’s communication strategy, which hit an all-time low under his predecessor’s watch. Under Patel, RBI reduced its interactions with industry representatives, giving rise to a perception that it is not as approachable as it was before.

Despite the government’s suggestions to RBI for opening liquidity support to NBFCs, the regulator continues to remain firm that measures have been taken to ensure adequate liquidity. At the last monetary policy meeting, deputy governor Viral Acharya said the central bank was not planning to open an additional window to support these companies. The market will be keenly watching whether Das does a U-turn on this issue.