In today’s Finshots, we tell you why Shaktikanta Das may get another term as RBI Governor.

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The Story

Every three years, a selection committee led by the Prime Minister picks the next RBI Governor. There’s no detailed rulebook for eligibility or any fixed checklist.¹ Just that the folks on the committee are experts in economics, banking, finance or public administration.

This year, though, something’s off. The government hasn’t even formed a selection committee yet. And with current RBI Governor, Shaktikanta Das, set to finish his term in December — less than a month away — there’s no buzz about a potential successor.

Naturally, this has sparked chatter that Das might just stick around for another term.

It’s not far-fetched either. Das took the helm in 2018, got reappointed three years later, and is now the second-longest-serving RBI Governor, only behind Benegal Rama Rau, who held the position for 7.5 years starting in 1949.² And another reappointment could cement Das as the longest-serving Governor in RBI’s history, provided he completes the extended term.

Which brings us to the real question — What makes Das so special that the government hasn’t lined up a successor yet?

Well, there aren’t any official reasons for this explicitly out there. So we’ll speculate a bit. And we have a couple of theories.

Maybe the government doesn’t want to shake things up too much?

You see, there are quite a few unfinished regulations the RBI has introduced for banks and financial institutions. These need to be fully implemented or, in some cases, revisited. And keeping Das at the helm could make this process a whole lot smoother.

Take the Expected Credit Loss (ECL) framework, for example.³ It’s a big change the RBI is gearing up to roll out for banks. Currently, banks set aside funds for loan losses only after they happen. But under ECL, they’ll need to be proactive — saving up for potential losses before they occur, like setting aside money for a rainy day. Banks will need to estimate credit default risks in advance. They’ll analyse historical default trends, predict future risks and set aside funds accordingly. So the riskier the loans, higher the provisions. The goal is to ensure that banks have stronger reserves to weather defaults.

Now, here’s where Das comes in. The RBI already rolled out this framework for NBFCs back in 2020, and Das was the one steering the ship then. He knows the drill — the challenges, the hiccups and the solutions. So, having him oversee the rollout for banks might just make the whole transition a lot easier. After all, he’s been there, done that.

Then there’s the bit about the RBI looking to tighten rules on loans for infrastructure projects. Because, let’s face it, they’re risky. These projects take years to complete before earning a single rupee. So, banks need to make calculated guesses about when they’ll start generating income and how much. Only then can they decide the loan amount and interest rate. But if a project stalls or gets scrapped, banks are left high and dry. That’s why these loans, called project finance loans, are structured so that repayments only start once operations begin.

And given the risks, the RBI is asking banks to set aside more funds as a buffer — upping provisions from 0.4% to 5% of the loan value. It’s a move to keep bank balance sheets stronger and resilient.

Of course, this is just one piece of the puzzle. The RBI also juggles things like keeping the Rupee stable, controlling inflation, tweaking interest rates and managing the delicate balance between bank loans and deposits.

Sure, a new Governor could handle and manage all of this. But Das brings the weight of experience. Under his watch, the Rupee has stayed stable, core inflation (not considering food and energy prices) hit a 4-year low of 4.3% in FY24 (even lower for core services) and India’s foreign exchange reserves soared to $700 billion, making it the fourth-largest in the world.

So maybe the government doesn’t want to risk handing over the reins to someone new at such a critical time, with delicate regulatory changes in progress.

Or maybe it’s the trust Das has earned from the government over the years?

Just think about it. A new RBI Governor would need time to get up to speed on everything that’s already in the works. And if disagreements crop up between the new Governor and the government, it’s a situation no one wants to be in.

But the chances of that happening with Shaktikanta Das are minimal, because ever since he took charge, such conflicts have significantly reduced.

To put things in perspective, you could look at how the RBI shares its profits with the government. Every year the RBI sets aside some of its profits as reserves and transfers the rest to the government. This money comes from lending, commissions and profits on foreign currency assets, after paying for expenses like printing currency and salaries.

This year, the RBI transferred a record ₹2.1 lakh crores to the government without a hitch. But six years ago, it was a different story.

Back then, the RBI couldn’t transfer enough to the government because it had spent heavily on printing new currency after the 2016 demonetisation, leading to disputes with the government over transferring reserves. That disagreement even led Urjit Patel to resign as Governor. And it wasn’t just Patel. His predecessor, Raghuram Rajan, also believed the RBI should have the freedom to say no to the government when necessary, to maintain its independence and serve everyone’s interests.⁴ This likely led to more conflict with the government rather than working in sync with them.

Das, however, has taken a different route.⁵ He seems to have found a way to balance the RBI’s autonomy while maintaining a collaborative relationship with the government. Perhaps that’s why he’s been their go-to choice for two consecutive terms, and who knows, maybe even a third.

The only potential conflict?

Interest rates.

Das has been a strong advocate against cutting rates to make borrowing cheaper, arguing that it’s crucial to control the flow of money and tackle inflation — especially until it hits the RBI’s target of 4%. Right now, overall inflation is just over 6%, which is actually the upper limit for tolerance, mainly due to rising food prices.⁶ So, the RBI will have to decide whether to cut rates or hold off, all while Das’ current term is winding down.

So yeah, whether that happens or not, the odds are largely in favour of Shaktikanta Das getting another term at the RBI. We’ll just have to wait and see if he ends up making history in the process.

Until then…

P. S.: An earlier version of this story incorrectly mentioned that inflation hit a 4-year low in FY24. We’ve now corrected it to specify that it was core inflation that hit a 4-year low in FY24. We regret the error.

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Story Sources: Hindustan Times [1], The Morning Context [2], CNBC TV18 [3], The Hindu Businessline [4], Financial Express [5], Deccan Herald [6]

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