Shaktikanta Das Image Credit: Wiki Commons

New Delhi: India named a former bureaucrat who oversaw Prime Minister Narendra Modi’s controversial cash ban program as its new central bank governor, a day after Urjit Patel abruptly quit following disagreements with the government.

Shaktikanta Das, 63, who often sought a cut in interest rates during his time at the Finance Ministry, was appointed for a three-year tenure, according to a statement on Tuesday from the Personnel Ministry. He will be the 25th governor of the 83-year-old monetary authority.

A former economic affairs secretary from 2015 to 2017, Das worked closely with the central bank and oversaw Modi’s plan to ban high value notes in late 2016, an exercise that hurt the economy and led to thousands of job losses. He is currently a member of the Finance Commission of India, and serves as the government’s representative at the Group of 20 summits.

The new governor takes over at a contentious time for the Reserve Bank of India. Modi’s government wants more control over the central bank’s functions and higher dividends to help finance its budget deficit. That caused friction between the authorities and Patel, resulting in his departure on Monday. The government is also pushing the RBI to loosen curbs on some of the weakest banks to ensure lending continues ahead of an election next year.

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RBI Independence

Patel’s departure, and Raghuram Rajan before him, indicates the “Modi government is strongly eroding the independence of the RBI,” said Said Haidar, chief investment officer of macro hedge fund firm Haidar Capital Management. “The government would like easier policy probably with an eye to next year’s elections. I doubt that a bureaucrat with close ties to the Modi administration will ease concerns over the independence of the RBI.”

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Markets swung between gains and losses on Tuesday as state election results showed Modi’s ruling party had lost support in key states. The rupee capped its biggest two-day drop since September, while one-month forward contracts weakened.

ABN Amro senior economist Arjen van Dijkhuizen said Das is well-known in government circles and should help ease tension between the RBI and the state, giving financial markets some relief.

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“However, it’s still quite early stage,” he said. “Longer term, the key question remains what all this will mean for central bank independence. Something markets will continue to follow closely.”

Interest Rates

Das will take charge of the six-member monetary policy committee, which left interest rates unchanged last week after two hikes earlier this year. With inflation undershooting the central bank’s forecasts, there are growing expectations that the RBI will shift to a neutral policy stance from its current tightening bias, which could set the stage for a rate cut.

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“There was a disconnect between the government and the central bank and the market now expects a less hawkish stance under the new regime,” said Aashish Sommaiyaa, chief executive officer at Motilal Oswal Asset Management Co. in Mumbai.

Modi initially brought Das into the finance ministry to head the revenue department, later moving him to economic affairs, where he oversaw the demonetisation program.

Das courted controversy in January last year when he sent a stern warning to Amazon.com Inc. for selling flip-flops with pictures of India’s revered icon Mahatma Gandhi.

“Amazon, better behave. Desist from being flippant about Indian symbols & icons. Indifference will be at your own peril,” Das said on Twitter at the time.

The government will look to Das to help provide much-needed liquidity to the banking system. Authorities want the RBI to do more to support crisis-ridden shadow banks, which accounted for at least 3 out of 10 fresh loans in the past few years. The crisis in the sector threatens consumption, the bedrock of Asia’s third largest economy.

The new governor will also have to sort out debt defaults in a banking sector saddled with bad loans and share oversight of state-run banks with the government.

“Das has got the right credentials,” said Ashok Chawla, a former finance ministry official. “He’s a balanced person who carries people along. He’s a consensus builder and that’s the need of the hour.”