Continuity signal for Mint Road

Urjit Patel, who proposed inflation-targeting and monetary policy committee, gets three-year term as RBI's 24th governor

Ending weeks of speculation, the government on Saturday named Deputy Governor Urjit Patel as the 24th Governor of the Reserve Bank of India. He will take charge in the first week of September when Raghuram Rajan demits office. The appointment is for a period of three years, following the recommendations of financial sector regulatory appointments search committee (FSRASC).

Patel, 52, will also be the first governor, under whom the monetary policy committee (MPC) will take a call on policy measures. The government will soon announce the composition of a six-member monetary policy committee to decide on interest rates. There will be three members from the RBI, including Patel and executive director Michael Patra.

The appointment of Patel is seen by many as continuation of Rajan’s unfinished agenda at the Reserve Bank of India. The RBI governor-designate who was in charge of the monetary policy department has been instrumental in India’s switch towards inflating targeting and consumer price index as the new inflation benchmark. Patel is considered hawkish, who, like Rajan, wants to bring down inflation within the accepted limit so that growth can take root firmly in the long run.

Patel, a former columnist for Business Standard, was named deputy governor of the central bank in January 2013 by the UPA government. In January 2014, he headed the committee that also suggested that RBI should try to keep the inflation contained at 4 per cent mark (with a standard deviation of 2 per cent) and if the central bank fails to do so, it should give a sound logic to the government.

Patel is known to have strong opinions about inflation in the country. He is also one of the key architects behind the liquidity framework that ensured that banking system liquidity always remained in the neutral zone.

But he is also the one, along with Rajan, who kept the system dependent on short-term liquidity in the initial period. The banking system went into a tailspin as liquidity shortage hit a record Rs 2 lakh crore in the system.

Even as bankers demanded more durable liquidity, Patel stuck to his stand that RBI had provided enough liquidity through bond purchases and short-term repo windows.

“We should look at the issue of liquidity and reserve money growth from the perspective of the nominal growth for the whole year,” said Patel in February this year. “I think the liquidity management has been adequate and we stand ready to do more.”

Bankers were clearly not amused. But he and Rajan corrected course soon after and decided to put more durable liquidity in the system.

While welcoming his appointment, many in India Inc said they hoped RBI will set in motion a series of interest rate reductions. “This will be the right time for interest rate reduction which Raghuram Rajan had held back in wait of more financial stability. Now, that we have achieved financial stability it is a good time to be more confident and reduce interest rate and give access to capital,” said Kiran Mazumdar Shaw, chairperson and managing director, Biocon.

Others said the appointment signals continuity. Larsen & Toubro CMD A M Naik said, “I was told Urjit Patel has been closest to Raghuram Rajan. So, Rajan’s policies are likely to continue.”

Patel’s appointment could also be good news for the market. Nirmal Jain, Founder & Chairman of IIFL Group, said it will ensure continuity in monetary policy at the RBI and that the market will likely react positively to Patel’s appointment.

Chanda Kochhar, MD and CEO, ICICI Bank, said Patel’s appointment would ensure a smooth transition and continuity in monetary policy, as India puts in place major structural reforms to transition to a higher growth path.

Media pitch had hit a frenzy with reports of all probable names being tossed out as Rajan’s successor. Among the names doing rounds were former RBI deputy governors Rakesh Mohan and Subir Gokarn, economic affairs secretary Shaktikanta Das, NITI Aayog vice-chairman Arvind Panagariya, prominent banker and BRICS Bank chief K V Kamath, former World Bank chief economist and chief economic advisor Kaushik Basu, SBI chairperson Arundhati Bhattacharya, chief economic advisor Arvind Subramanian and former chief economic advisor Ashok Lahiri. But in all the probables, the common one was Urjit Patel.
TASK AHEAD

• Steering MPC and inflation management
   
• Cleaning banks’ balance sheets
   
• Smooth FCNR -B deposit redemption
   
• Roll-out of new specialised banks
   
• Pushing growth