Mumbai: RBI Governor Shaktikanta Das heads into his second term with increasing pressure to pivot back toward battling inflation and winding down his crisis-era policy settings.
Having kept the main interest rates steady on Wednesday, Das starts his next three-year term from December 11 with some in the bank already calling for unwinding the ultra-loose policies. One of the six members on the monetary policy committee has been vocal about it since August.
Das's colleague on the panel, Jayanth R Varma has dissented against the Reserve Bank of India's lower-for-longer stance to boost growth, which he said is creating an "erroneous perception" that policy makers were no longer serious about fighting inflation — which was cemented into law in 2016 as monetary policy's primary objective.
The view that rates cannot be anchored at historical lows for long is gaining ground given the inflationary pressures. Mridul Saggar, an executive director at the RBI and a member of the monetary policy committee, at the October meeting said "negative real rates" should be "corrected."
"One of the biggest challenges for the governor over the next year would be to strike a right balance between normalising monetary policy without pushing the market rates to levels which can deter growth recovery," said Anubhuti Sahay, Mumbai-based South Asia chief economist at Standard Chartered Plc. She's forecasting a rate hike in August next year "though risk of it being delivered earlier exists if inflation stays elevated."
Inflation has hovered above the RBI's 4 per cent medium-term target for 25 consecutive months, but it isn't exactly on fire at the moment. That said, risks loom in the form of rising food costs, higher fuel prices and global uncertainties, Bloomberg reported.
"Price stability remains the cardinal principle for monetary policy as it fosters growth and stability," Das said on Wednesday. "Our motto is to ensure a soft landing that is well timed."
Economists have penciled in the first significant rate hike in the second quarter of 2022, while swap markets had been factoring in an increase this month in the reverse repo -- a step promoted by Varma -- which is the level at which the central bank absorbs excess cash from lenders.
On Wednesday, policy makers decided to leave the rates unchanged citing risks to recovery from the omicron variant of coronavirus, and instead opted for incremental steps to absorb liquidity, which at about 9.2 trillion rupees ($122 billion) is close to a record and presents an immediate risk to inflation.
Das has also shown he's ready to use the RBI to protect against financial instability from lenders and the growing popularity of virtual private currencies.
Just last month, the RBI took control of Reliance Capital Ltd., a company controlled by former billionaire Anil Ambani, citing a failure to meet payment obligations and "serious governance concerns" that the board failed to remedy.
This was the latest clean-up job by the central bank in a long line of shadow banks that have folded since 2018. Dewan Housing Finance Corp. got sold to Indian billionaire Ajay Piramal, while Srei Infrastructure Finance Ltd. and Srei Equipment Finance Ltd. were taken over by the RBI in October.
Das also oversaw the rescue of private sector lender Yes Bank Ltd. by government-run State Bank of India, and has barred corporates from entering the banking sector.