Man of the establishment

The long wait is finally over. On Saturday, the government appointed eminent economist and banker Urjit Patel to replace Raghuram Rajan as the new Reserve Bank of India governor. Patel will take charge on September 4, the day Raghuram Rajan completes his three-year term. Many in the media have viewed Patel’s appointment as an indicator of the NDA government’s desire for continuity in framing India’s monetary policy. At present, Patel is one of the four deputy governors at the RBI. He has run the central bank’s monetary policy department and has worked closely with Rajan at the Central bank. As Deputy Governor in January 2014, Patel headed the RBI committee to draft the monetary policy report, which became the basis of the ongoing reforms at the apex bank. The committee made three significant suggestions that would go on to form the bedrock of the RBI’s approach to monetary policy today. 

Its first recommendation was to promote the use of consumer price index (CPI) to measure inflation over the wholesale price index (WPI). The second major recommendation was to set up an inflation-targeting framework, which tasks the RBI with maintaining inflation at close to 4 percent (+/-2 percent) in the medium term. Finally, the Patel committee report also formed the basis of the Monetary Policy Committee (MPC), which takes 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.

There are some immediate policy concerns that Patel will have to address. The first task will be to get the MPC up and running before the RBI’s next policy review in October. His second major task will be to curb consumer price inflation. Consumer prices rose at a frightening pace to 6.07 percent in July from a year ago, up from June’s 5.77 percent annual gain. This spike in inflation has been attributed to soaring food prices. One of Patel’s greatest challenges will be to assess whether the RBI’s accommodative monetary policy stance, adopted since the start of last year, needs to change. Since January 2015, the RBI has cut the repo rate (the rate at which the RBI lends to other commercial banks) by 1.5 percent to spur growth. Patel’s appointment is a clear signal from the government that it wants to keep inflation on a tight leash. Experts contend that Patel shares Rajan’s outlook on inflation targeting and fiscal conservatism. Thus, any immediate hope for a rate cut from the RBI has faded away with his appointment. 

The third major task will be to further the banking reforms initiated by the RBI. One of the major tasks that Rajan has undertaken during his tenure is the proposed clean-up of bank balance sheets initiated under the RBI’s Asset Quality Review, much to the chagrin of wasteful major corporate borrowers. The RBI’s asset quality review covered 36 banks (including all those in the public sector). Its latest Financial Stability Report is full of bad news. Foreseeing a worsening situation of bad loans in the country, the Central bank recently announced that the gross non- performing assets of the banks can rise to as high as 9.3 percent in 2016-17, before any hopes of any improvement. One criticism of the Rajan-led RBI is that its call for “deep surgery” of the banks came late. However, there is hope that Patel will continue with the reform impetus Rajan has offered to the banking sector. If he fails, it could take the Indian economy a few steps back. 

But more than these proposed policy concerns, commentators contend that the biggest challenge in front of Patel will be to communicate the RBI’s agenda to both markets and other stakeholders. One of Rajan’s greatest quality as a central banker was his ability to communicate the RBI’s policy initiatives across all platforms. A criticism often laid at Patel is his perceived inability to communicate with markets. Unlike Rajan, who is seen out in public giving speeches and laying out the RBI’s agenda, Patel has been criticised by certain sections for his reluctance to communicate with markets between the RBI’s policy reviews.  

Despite these perceived shortcomings, Patel is no stranger to workings of the higher echelons of government. He had caught the eye of PV Narasimha Rao government in the early 1990s when he was selected by the International Monetary Fund to head its India office. The then Finance Minister Manmohan Singh was so enamored by Patel that he asked the IMF to “loan” him for two years to be an advisor in the Ministry of Finance at the end of his stint, according to the Indian Express. Since then, Patel has established close ties with the Congress leadership, corporate honcho Mukesh Ambani and Prime Minister Narendra Modi. The positive feedback from the corporate sector to his appointment as RBI Governor is indicative of this cozy relationship. Patel also once lead the energy operations of the Mukesh Ambani-led Reliance Industries for two years. It was during his tenure at Reliance that he met with the then Gujarat Chief Minister. Patel served as a non-executive director on the board of Gujarat State Petroleum Corporation between 2005 and 2006.

His past is indicative of the ties he shares with the establishment cutting across political lines. But will he be beholden to corporate interests while framing India’s monetary policy? One of Rajan’s greatest qualities is his ability to withstand pressure from corporate interests and political animals within the establishment to frame India’s monetary policy. With the MPC yet to convene and present its outlook, only time will tell.-