Opinion
From North Block to Mint Street: Sanjay Malhotra has his task cut out as RBI’s next governor
Summary
- The Governor-designate of the Reserve Bank of India will need to tread a fine line on the question of monetary-fiscal policy coordination to arrive at an optimal balance that favours India’s economy
On Monday, we finally got the news that every Indian with even a passing interest in the economy had been waiting for. Ending weeks of speculation over whether Shaktikanta Das would be given an extension of an already extended term, the government announced that revenue secretary Sanjay Malhotra will take over as the next governor of the Reserve Bank of India (RBI).
This brings the curtains down on an eventful term under Governor Das, whose time at the central bank’s helm was marked by many challenges, such as guiding the economy through the pandemic, new kinds of inflationary pressures and various global uncertainties.
RBI was also at the forefront of innovation, whether in the field of digital finance or with an e-rupee. Malhotra steps into the shoes of someone who came into RBI as a relative newbie (a history student with a long civil-service career), but soon went on to prove himself as more than equal to the task.
No doubt, the governor-designate’s training in information technology, together with his long years as a bureaucrat, will help him make the transition from North Block to Mint Street.
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Unlike Governor Das, who had the advantage of a seasoned deputy governor in charge of monetary policy, Michael Patra, and an experienced Monetary Policy Committee (MPC) when he took over, the new governor will have to learn the ropes in a very short period, given his last-minute appointment, and with a relatively new team.
Patra is due to retire and is expected to step down shortly, while the MPC was reconstituted less than three months ago. At least Malhotra has his task cut out for him. Governor Das has often spoken of the value of monetary-fiscal policy coordination.
At the Southeast Asian central banks forum earlier this year, Das said, “India’s coordinated policy response in the face of a series of adverse shocks can be a good template for the future. While monetary policy worked on anchoring inflation expectations and quelling demand-pull pressures, supply side interventions by the government alleviated supply-side pressures and moderated cost-push inflation."
This is sound advice for such circumstances; both policy levers must act in unison.
At other times, though, RBI has the onerous job of limiting potential damage from fiscal policy, especially if it threatens to be inflationary, if needed, by “withdrawing the punch bowl just as the party gets going," in the words of William McChesney Martin, who led the US Fed for almost two decades.
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This isn’t always easy. The fiscal dominance of monetary policy means much of RBI’s work is circumscribed by the Centre’s decisions. Given their different time horizons and the vulnerability of governments to fickle electorates, differences with the central bank are par for the course.
Not only in India, but the world over. Successful central bank governors are those who know how to tread the fine line between cooperating with the Centre when the situation requires it and speaking truth to power at other times. Sanjay Malhotra too must frame policy with the long-term interests of the country in mind.
Kristalina Georgieva, managing director of the International Monetary Fund, put it well: “Central bank independence matters for price stability—and price stability matters for consistent long-term growth. Risks of political interference in banks’ decision making and personnel appointments are rising. Governments and central bankers must resist these pressures."
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