Patel to steer clear the challenges
The newly appointed Governor of Reserve Bank of India, Dr Urjit Patel has many tough challenges to overcome and to maintain the momentum of Indian economy. His appointment signals continuity in the overall policy stance of the RBI. Dr Patel has been Deputy Governor for three-and-a-half years, and in that sense is an insider. He was head of the monetary policy department, among other things. He also chaired the committee that laid the framework for inflation targeting. This became the predominant mandate of the RBI, when the government and the RBI signed an agreement last year. That agreement gives priority to inflation control over other objectives.
As a follow-up to that agreement, this month, the government notified and formally adopted the consumer inflation (CPI) target of 4% plus, or minus 2%, for the period till March 2021. If RBI misses the inflation target for three consecutive quarters, then it has to explain to lawmakers as part of the new statutory process. The CPI inflation has already inched past the 6% mark, which has surely put RBI on full alert. Being governor of the central bank of the third largest economy (in size measured by purchasing power parity) is itself quite a formidable responsibility. In addition, Dr Patel is also filling in the shoes of Dr Raghuram Rajan whose tenure has been impressive. There is Rajan's inflation fighting record. Average inflation in the five years prior to Rajan was about 10.4%. This came down to an average of 6.6% in the past three-year period.
Further, the exchange rate stabilised, with the rupee down only moderately in the past three years, as compared to the panic fall prior to August 2013. Even the volatility in the exchange rate movement has become subdued. Also, the benchmark interest rate, as measured by the yield on ten-year government bond. has come down sharply, being close to 7% now.
In the coming days, the new Governor has major challenges to tackle. Firstly is the inflation challenge. The CPI-based inflation has already crossed the red line of 6%, which is the upper band permissible according to the new framework. Of course, henceforth, the rate will be decided by the Monetary Policy Committee, and not by the Governor alone.
The second challenge is to tide over smoothly the large forex repayment that is becoming due in a couple of months. The third challenge is to guide banks to come out of their stressed assets situation. This is an ongoing battle, and will take several years. None of these challenges is new, nor is the incoming central banker new to the task. Beyond these, there are the myriad daily issues to solve and hurdles to surmount. Patel has his task cut out.
Besides, there will hardly be any scope for tension between Mint Street and North Block now that monetary policy is to be decided by a six-member Monetary Policy Committee. It will have two representatives of the Finance Ministry as well. The RBI Governor will chair the meetings of the MPC and expectedly will play a major role in its deliberation along with two representatives of the central bank. Though an academic debate on inflation versus growth might still persist, but the monetary policy set in a transparent manner by a representative MPC will carry much conviction. Meanwhile, Patel will have his task cut out to clean up the banking sector. In our view the biggest reform will come when banks are insulated against undue political interference, when a finance minister's son does not dictate key appointments as also huge disbursals of loans. Patel is fortunate that he can rely on the full backing of the Government in professionalising the banking sector. Meanwhile, given that he likes to keep a low-profile, and does not go around dispensing gems of wisdom, it will keep him away from unnecessary misunderstandings and controversies. RBI governors should speak through their policies, not by playing celebrity or acquiring a rock star persona.
