Patel's elevation may ease govt-RBI relations

Outgoing governor Raghuram Rajan is said to have shared a cordial relationship with PM Narendra Modi and Finance Minister Arun Jaitley

With the appointment of Urjit Patel as the 24th governor of the Reserve Bank of India (RBI), the relationship between the government in Delhi and its central bank in Mumbai is expected to be reset.

Outgoing Governor Raghuram Rajan is said to have shared a cordial relationship with Prime Minister Narendra Modi and Finance Minister Arun Jaitley. However, his public comments on matters outside his official brief and personal attacks on Rajan by a member of the ruling party had caused discomfort on both sides.

The central government will seek to avoid any situation that will lead to a deterioration of the institutional association between the government and RBI. To that end, Patel seems like a perfect candidate. Patel is known to be reticent in public and reserved in his opinions, and hence it is expected that apart from issues related to monetary policy and the economy, he will not speak on controversial issues.

Sources say there is no question of compromising with the central bank’s independence. “There will always be differences between the governor and the finance minister on growth and inflation issues because of the nature of their responsibilities. There is institutional respect on both sides,” said an official.

Patel is known to share Rajan’s views on a number of issues, including inflation targeting, liquidity in the banking system and RBI’s role in the currency markets. However, on other areas like the crippling level of non-performing assets, and the best way to clean up the bank balance sheets, he has not said much. So, it remains to be seen what sort of a comfort level the government and RBI have on these issues.

A panel led by Patel was the first one to propose inflation targeting. The new governor is an inflation hawk and the Centre will look for a fresh start on that front with the soon-to-be-formed monetary policy committee.

The government never officially reacted to some of Rajan’s controversial statements like India’s growth was akin to a ‘one-eyed king in a world of the blind’ or when he spoke out on the raging debate on intolerance last year, or when he gave Hitler’s example to make the point that strong governments will not always move a country in the right direction.

However, privately, there was consternation among the political as well as bureaucratic elements of the government. Most of them agreed that whatever his personal views, he also represented an institution. On the one hand, a government which knows the importance of image management, and on the other, a globally respected economist whose opinions are taken seriously by Indian and international investors. Things were bound to get controversial. 

In the weeks leading up to Rajan’s announcement that he will return to academia, the ruling Bharatiya Janata Party’s Rajya Sabha member Subramanian Swamy attacked Rajan’s credentials viciously and even questioned his ‘Indianness.’ Swamy was not stopped or rebuked publicly till he extended his tirades to serving policy-makers in the finance ministry.

During Rajan’s tenure, there was also a long tussle between RBI and the government over the composition of the Monetary Policy Committee and some proposals in the 2015 Finance Bill, which were later withdrawn, on taking away RBI’s powers to regulate government security (G-Secs) markets and issue G-Secs. 

RAJAN’S FRICTION POINTS

On governance

• February 2015: Giving the example of Adolf Hitler, he said a strong government may not necessarily move a country in the right direction

Aftermath of the Dadri killing

• October 2015: “Excessive political correctness stifles progress as much as excessive licence and disrespect.” He implied a nature of intolerance for others’ ideas and choices will be detrimental for the country

On growth

• April 2016: “I think we have still to get to a place where we feel satisfied. We have a saying — In the land of the blind, the one-eyed man is king. We are a little bit that way”

Monetary Policy Committee

• There was also a long tussle between RBI and the govt over the composition of the Monetary Policy Committee and some proposals in the 2015 Finance Bill, which were later withdrawn, on taking away RBI’s powers to regulate the government securities (G-Secs) markets and issue G-Secs