Dawn of a new era

Urjit Patel assumed office as the 24th governor of the Reserve Bank of India on Sunday. But it will be the words of his predecessor Raghuram Rajan, based on which one could measure the success of his three-year tenure. The former incumbent left with a parting note of caution, stating that the independence of the RBI must be maintained. This may be a little difficult for the new incumbent, considering that the new Monetary Policy Committee, which will take away a lot of the RBI Governor’s powers in framing interest rates. Until this year, the short-term lending rate was decided solely by the governor in consultation with a technical advisory panel within the RBI. The MPC’s sole task will be to target inflation. It will be made up of three members from the RBI, including the Governor, and three nominated by the government. It will meet at least four times a year and will publicise its decisions after each meeting.  Unlike the previous arrangement, the RBI governor will not have veto powers. But he will have a casting vote in the event of a tie. Under Rajan, the RBI has admittedly shown a great deal of independence from political and corporate pressure. But a model where the RBI governor is the sole arbitrator of a nation’s monetary policy will not leave the institution in good health. 

Under the revised MPC, the RBI Governor will have to consult the committee before a final decision is taken on lending rates, leaving the institution in a better shape.  This represents a significant shift. But the ability to work with a new MPC isn’t the only challenge standing in the way of an independent Central bank. Results from the first quarter of the current financial year detailed that India’s economy emains in the doldrums. The Indian economy grew at 7.1 percent in the April-June period of the current fiscal, the lowest figure posted in six quarters. Analysts had predicted GDP growth in the 7.4 percent to 7.6 percent range, making the final figure a cause for much disappointment. Serious efforts to accelerate the economy will be required if the growth rate is to reach the Centre’s 8 percent Gross Domestic Product growth target for the year.  

However, the ultimate challenge will be to contain inflation within reasonable limits. From high inflation through much of the start of this decade, India began to benefit with a massive drop just as the current NDA took office. This was largely down to the huge slump in crude oil price the world over, and, as a major importer, India has been a major beneficiary. At present, India is incurring a massive Rs. 4.5 lakh crore on crude imports which was earlier Rs. 7.5 lakh crore. Although experts contend that oil prices will not return to the highs of $100 per barrel, the Centre cannot function under the presumption that prices will remain low in the long-term. At present, it’s currently at around $47 per barrel. Recent developments in the past day and a half could have serious implications for the Indian economy. Earlier this week Russia and Saudi Arabia agreed to stabilise the oil market, which they hope would send prices higher. The two largest oil producers have decided to work together and plug the global glut. But neither nation went into the specifics of how they would boost prices. If Russia and Saudi Arabia decide to plug the global glut, one can expect the likes of OPEC (the oil producer’s cartel) to fall in line. Officials from both nations are expected to meet once every few weeks to formulate a plan. Previous attempts by the cartel to force a rise in prices have not yielded much success due to the production of American shale oil. But the potential for a production freeze, which could jack up prices, remains a serious possibility. One of Russia’s closest allies, Iran, has just entered the international oil market in a major way, ever since Western-backed economic sanctions were dropped. With Russia leading these negotiations, major oil-importing nations like India need to be prepared for the potential fallout.

Beyond rising crude oil prices, the new RBI incumbent will also have to contend with effects of a positive monsoon, the implementation of the Seventh Pay Commission on short-term inflation and rising food prices. Despite these circumstances, the Centre continues to demand lower interest rates from the RBI.   The government seems unperturbed by the fact that RBI has been specifically tasked to manage inflation. Last year, the Centre and the Reserve Bank of India signed an agreement, under which the central bank will prioritise controlling price rise above the other objectives of the monetary policy. The Central bank will look to contain consumer price inflation within 6 percent by January 2016 and within 4 percent with a band of 2 percentage points for all subsequent years. The new RBI Governor’s ability to contain inflation and other such concerns, while handling the demands of the government and industry, will determine the success Urjit’s tenure. Can he step into Rajan’s shoes? Only time will tell.