Ending weeks of speculation, the government has announced the appointment of Sanjay Malhotra as the Reserve Bank of India Governor, who arrives at a crucial time when the central bank is battling at several fronts.
Malhotra succeeds Shaktikanta Das, who steered RBI and India’s monetary policy and financial regulations through the turbulent period of the Covid pandemic and largely did a successful act of balancing growth and inflation dynamics.
Malhotra’s takes over when the central bank is battling on several fronts. CPI inflation in India remains above the RBI’s upper tolerance limit, with the latest October figure reaching 6.21%, driven by high food inflation.
While the RBI is not directly tasked with promoting economic growth, its monetary policies significantly influence economic activity. Currently, India’s GDP growth remains unexpectedly weak, with the latest Q2 figure falling to a seven-quarter low of 5.4%, necessitating a liquidity boost from the central bank.
One of the biggest firefights the incoming RBI governor faces is on the rupee front as the Indian unit is hitting record lows despite RBI rifling through its mammoth forex reserves to prop up the unit. With Donald Trump becoming the US President, there is high likelihood of trade and currency wars, and the RBI would have to tread very carefully in the aggressive geopolitical scenario.
Over the last several years there has been a huge increase in compliance needs of banks, NBFCS and FinTechs. The RBI has also penalised several financial institutions, including storied banks such as Kotak Mahindra Bank and unicorn fintechs like Paytm over compliance. The new governor will have to strike a balance over security, stability and innovation, giving space for the new-age financial firms to thrive.
The outgoing governor Shaktikanta Das was vehemently opposed to cryptocurrencies, but after Trump coming into power in the US, the crypto hopes are revived. The world is also looking at alternatives. It will be interesting to see what strategy the new governor will take on virtual digital assets.
Banking sector
The RBI governor faces several challenges in the sector as banks are increasingly resorting to liabilities like bulk deposits to address incremental credit demand, while certain personal loan segments continue to grow despite higher risk-weights being introduced. Additionally, top-up loans are expanding rapidly.
Retail customers are increasingly seeking alternative investment opportunities, which is putting pressure on banks’ funding. As a result, banks are turning to short-term non-retail deposits and other liability instruments to meet the growing credit demand. However, this reliance on short-term measures could pose structural liquidity risks to the banking system.
There are concerns about the rising credit growth in unsecured consumer loans, such as credit card debt, despite regulatory measures to increase risk weights in these segments. This growth requires careful monitoring of underwriting standards and post-sanction assessments to prevent long-term risks.
Concerns have emerged about adherence to regulatory guidelines related to loan-to-value (LTV) ratios and end-use monitoring. Some entities have deviated from these guidelines, raising the risk of funds being deployed in unproductive or speculative investments.
Moreover, global technological disruptions, such as the recent IT outage that impacted businesses worldwide, have highlighted the growing reliance on technology and third-party service providers in the financial sector. The new RBI governor needs to ensure robust IT risk management frameworks, cybersecurity measures, and business continuity plans to ensure operational resilience and safeguard against such vulnerabilities.
Moreover, NBFCs face a funding crunch due to the RBI’s risk weight regulations curbing bank lending to them.
Shaktikanta Das’s legacy
Shaktikanta Das assumed office as the 25th Governor of the Reserve Bank of India (RBI) following the controversial departure of his predecessor, Urjit Patel, amid disagreements between the RBI and the government over fiscal policy and banking regulations.
Das took on the role with a balanced approach, advocating for the RBI’s independence while keeping communication channels open with the government.
The RBI, under his leadership, introduced measures during the pandemic to support the economy, including historic monetary easing, reducing the repo rate to a record low of 4% in 2020, and implementing loan moratoriums and liquidity infusion packages.
Despite supply-chain disruptions and global economic pressures, Das has successfully managed to reduce inflation through strategic monetary policies. CPI inflation, which peaked at 7.79% in April 2022, has since declined and is now stable in the 5-6% range. His policies have effectively pursued the dual goals of curbing inflation and supporting economic growth.
His tenure also saw a tightening of financial regulations and a crackdown on erring entities.
