The chequered legacy of Shaktikanta Das at the Reserve Bank of India

Since the Reserve Bank of India was established in 1935, it has had 25 governors, 14 of whom were bureaucrats and seven were economists. Five of the 14 bureaucrats were secretaries in North Block before crossing over to head Mint Street.

Most of them had a background in economics, unlike Shaktikanta Das, the bank’s 25th governor, who holds a master’s degree in history. Das stepped down as governor on December 10, ending a six-year tenure.

Veteran English economist John Keynes was said to have been so impressed by the first Indian RBI governor, CD Deshmukh, that he recommended him to be the managing director of the International Monetary Fund, which was opposed by USA.

YV Reddy, the bank’s 21st governor from 2003 to 2008, steered the Indian banking system through the 2008 global liquidity crisis, winning praise from Nobel Laureate and American economist. “If America had a central bank chief like YV Reddy, the US economy would not have been in such a mess,” Stiglitz said in 2009.

Despite the scepticism Das faced for not having an economics background, his legacy speaks for itself: success in defying the pandemic years to ensure financial stability, building up sizeable foreign exchange reserves of $702bn , fostering a modern digital system and handing over a huge dividend cheque to the government of Rs 2.4 lakh crores in the year 2023-2024.

Yet, Das stubbornly held on to the repo rate at 6.5% for 22 months. This is the rate at which other banks borrow money from the RBI and is a mechanism to control inflation. However this decision is partially responsible for the sluggish growth of India’s gross domestic product – 5.36% in the July-September quarter for the financial year 2024-’25. This is the slowest in seven quarters following an average growth rate of 8% over the last three years.

The Reserve Bank has now downgraded its growth forecast for 2025 to 6.6% from its earlier estimate of 7.2%.

Like Paul Volcker, chairman of US Federal Reserve who tackled inflation in the 70s by raising the repo rate, Das increased India’s repo rate sharply from 4% in April 2022 to 6.5% in January 2023. This ensured that the overall consumer price index – a measure of the cost of goods and services consumed by households – did not exceed the 6% cap on retail inflation set by the Reserve Bank and the finance ministry.

Core inflation, which excludes food inflation, has remained moderate at around 4%. But it is food inflation that accounts for 48% in the consumer price index and has remained very high, in the range of 10% to 12%. Since 2019, food inflation has been on the higher side, climbing from 2% in January to 14% in December that year. India’s Chief Economic Advisor VA Nageswaran has been clamoring to exclude food inflation from the purview of inflation monitoring. Food inflation, Nageswaran says, is driven by exogenous factors – for instance, factors influenced by supply.

Das has been steadfast in resisting this suggestion. However, the high repo rate seems to limit borrowings by the manufacturing sector. The share of the manufacturing sector, the mainstay of employment in India, is stuck at 16% of the GDP. This despite the grandiose projection by the National Manufacturing Zone Policy of 2011 that it would rise to 25% by 2022 and generate 10 million new jobs every year.

As governor, Das said in October that a lot of work had gone into stabilising inflation. “We have to be very careful before opening the gate of the stable because there is every chance that the inflation horse will simply bolt again,” he said.

Das had a strong ally in deputy governor Michael Patra, who has argued that the wedge between headline and food inflation is widening, “stalling the alignment of the former with the latter”.

Pitted against Das and Patra were two external members of the government’s Monetary Policy Committee: economists Jayanth Varma and Ashima Goyal. Varma was of the view that given the massive infrastructure investment by the government and the scope to expand manufacturing, India’s potential to achieve 8% growth is possible. Varma has been pushing for a 50-basis point reduction in the repo rate, bringing it down to 6%. A basis point is one-hundredth of a percentage point.

Goyal had pitched for a 25-point reduction.

The new members of the Monetary Police Committee, appointed in October, also include two dissenters: economists Nagesh Kumar and Ram Singh, the external members, are pitching for a reduction of 25 points. Kumar has said that industry is suffering from “demand deficits” in domestic and external markets.

“Given that the industrial demand is flagging, a rate cut will help revive demand and support private investment,” said Kumar. Singh, director at the Delhi School of Economics, has also recommended a 25-point reduction.

Most central banks have been reducing their repo rates after inflationary pressure was tamed. For instance, in the United States, the Federal Reserve in September lowered its interest rate from 5.5% to 5%. In October, the European Central Bank lowered its interest rate from 4.25% to 3.65%. The Bank of England in August cut its rate from 5.25% to 5% and then to 4.75% in November.

China has also reduced interest rates from 2.3% to 2%.

Developed countries have a lower threshold for inflation than India does. The general trend is to bring down the repo rate now that inflation has been tamed. In India, food inflation, which was around 9.5% in December 2023, has shown a decelerating trend, reaching 5.6% in August. This is cause for cheer for Das, who staved off pressure from Finance Minister Nirmala Sitharaman and Commerce Minister Piyush Goyal, who said the correlation between food inflation and interest rate was “absolutely flawed”.

In that, Das was like Reserve Bank governor Raghuram Rajan, whom Arun Jaitley, as finance minister, tried to pressurise into reducing the repo rate. Das defended his autonomy in decision-making involving monetary policy. But in view of the prevailing economic situation, Das’s ostrich-like approach to the repo rate comes off as flawed.

The conventional opinion used to be that while fiscal policy related to government spending and taxation would spur growth, monetary policy taken by the central bank on money supply should focus on taming inflation and ensuring adequate credit circulation at affordable rates. In recent years, however, fiscal policy and monetary policy are increasingly looked upon as two wheels of a nation’s chariot that must move together to achieve growth with monetary stability.

A major reason for the deceleration in India’s growth from 9% in 2006 to around 6.6% is the reduction in private sector investment, from 29% in 2006 and has decreased to 23% over the last decade. To spur private investment, particularly in the manufacturing sector, the cost of credit is an important contributor. Former Reserve Bank governor C Rangarajan has said that monetary policy has effective brakes, but its capacity to accelerate growth is rather limited.

To Das’s credit, under his supervision, banks ensured adequate credit flow to medium, small and micro enterprises when Sitharaman introduced fiscal stimuli, especially collateral-free loans for the sector during the pandemic years. With a quiet and firm demeanor, Das never carried out the public bidding of the finance minister, as it was feared he would do. Yet, India’s growth imperative also deserved his equal attention. History will judge Das as an RBI governor who quietly rose in stature and befuddled the sceptics as he kept a tight leash on inflation.

SN Misra is presently Emeritus Professor at Kalinga Institute of Industrial Technology, University, Bhubaneswar.