Promise of continuity

Urjit Patel's elevation shows govt's support for fighting inflation

The appointment of Urjit Patel as the Reserve Bank of India’s 24th governor signals the government’s firm backing to the central bank’s thinking on monetary policy. Mr Patel, who is the chief architect of the new monetary policy committee (MPC) framework that is expected to come into existence shortly, offers the promise of continuity with most policies of the man he will replace, Raghuram Rajan, who was feted by investors for halving inflation and pulling the country out of its worst currency crisis in over two decades. This is crucial, as Mr Rajan’s exit was laced with some unsavoury episodes that raised questions about the government’s expectations from the new RBI chief. The elevation of Mr Patel, who played a pivotal role as the RBI redefined itself as an inflation-targeting central bank, will definitely boost policy credibility.

The fact that he was reappointed as deputy governor and now promoted as governor shows the strong support he enjoys from the government. This will come in handy to successfully run the MPC at a time when the governor’s role is fundamentally different from what it was in the past. Under the MPC, decisions about interest rate will have to be taken by a six-member panel, with equal representation from RBI and independent experts to be appointed by the government. Unlike past governors, Mr Patel would have to deal with the government’s point of view on monetary policy in a very formal setting. This is not an easy task even at the best of times. How Mr Patel shepherds the MPC will be keenly observed.

There is, of course, no dearth of other challenges for Mr Patel as he takes over the reins of the RBI at a time when the domestic economy is going through a critical phase. It is noteworthy that several attempts at regaining the growth momentum that was lost in the aftermath of the financial crisis of 2008-09 have failed. It is true that India has recovered better than all its peers, yet the economy suffers from some serious structural flaws that can hold back the country from realising its growth potential. The key among these is the state of bad debts in banking. And there are two challenges herein that Mr Patel is only too well aware of.

First, investors will look to the new governor to continue the banking sector clean-up with the same urgency as Mr Rajan, who was targeting fully cleaned-up and provisioned balance sheets by March 2017. The second related challenge is about boosting debt recovery. The RBI, the government and the Banks Board Bureau have tried many different, and progressively more forceful, means to ensure the process is quickened. However, till now such efforts have yielded little success. Mr Patel would have to work with the government to find a breakthrough. Another crucial task will be to communicate to external stakeholders why their fond hopes of a rate cut are unlikely to materialise soon.

Lastly, Mr Patel’s most enduring challenge will be to revive the domestic investment cycle in the economy, without which growth will remain range-bound, especially in the absence of any global trigger. Here, too, he is likely to face the same predicament that plagued Mr Rajan’s tenure — how to spur growth while keeping inflation within bounds.