NEW FACE, OLD VALUES
THE AFFABLE NEW GOVERNOR AT MINT ROAD WILL HAVE TO STRIKE A FINE BALANCE BETWEEN TARGETING INFLATION AND PUSHING GROWTH
When Raghuram Rajan, the 23rd governor of the Reserve Bank of India (RBI), decided not to seek a second term, he chose a Saturday—when stock markets are closed—to announce the decision so that there would be no knee-jerk reaction from market players. The government, announcing Rajan’s successor some two months later, also chose a Saturday, August 20, with similar intent. But the markets fell anyway, the rupee sinking to its lowest in June, on the Monday after Rajan’s surprise announcement. Likewise, on August 22, the first working day after the government said RBI deputy governor Urjit Patel would take over from Rajan, the markets fell, with the benchmark Sensex tumbling over 130 points in morning trade. The rupee also slid to a three-week low of 67.21 against the dollar.
The fall wasn’t drastic, but the reason for the dull sentiment wasn’t far to seek. Patel, 52, who will step out of the shadows and into Rajan’s shoes on September 4, is widely seen as an inflation hawk, and is likely to continue the latter’s relentless fight against high inflation. Rajan’s obdurate stand on inflation meant that he upset many in industry as well as the ruling party at the Centre.
To the Kenyan-born Patel’s credit, he has been in the good books of both the UPA and the present NDA government, holding several top positions, be it as head of the International Monetary Fund (IMF) in India in the 1990s, advisor to the finance ministry when Manmohan Singh was PM, or even corporate roles—both as a director of the Gujarat State Petroleum Corporation in 2005-06, when Narendra Modi was chief minister, and heading the Mukesh Ambani-led Reliance Industries’ energy business for two years. This should silence the harsh critics, some of whom had even questioned Rajan’s patriotism, considering he has mostly lived and worked outside India. “He (Patel) is the right man to succeed Rajan. Who better than him to see what needs to be done to stimulate growth and contain inflation?” Infosys founder N.R. Narayana Murthy said. Mahindra Group chairman Anand Mahindra called him “young, qualified and experienced”.
The biggest critic of Rajan’s policies was BJP Member of Parliament Subramanian Swamy, whose public tirade against the governor probably paved the way for his exit (without the two-year extension that most governors have got since 1991). Rajan, who initially raised interest rates and held them steady in the first 16 months of his tenure, lowered them only in January 2015, easing them by all of 1.5 percentage points since then. In the last monetary policy he chaired in August, he chose to keep rates where they were—the repo rate (the rate at which banks borrow from the RBI) at 6.5 per cent, and the cash reserve ratio (CRR, the percentage of the total deposits that banks have to keep with the RBI), at 4 per cent.
Interestingly, Patel is considered a close confidant of Rajan’s (who constituted a committee chaired by Patel to revise and strengthen the monetary framework in India immediately after becoming governor in 2013). Rajan also relied on the report authored by Patel on inflation targeting and using consumer price inflation or retail inflation (as reflected in the retail prices of a basket of goods and services) as a truer measure of inflation. Which is to say that those who are expecting a drastic policy change at the RBI after Rajan’s exit may be disappointed.
“Urjit has been at the helm of institutionalising the inflation-targeting regime in the monetary policy framework. His appointment signals continuity of policy intent, both on the part of the RBI and the government,” says Arundhati Bhattacharya, chairman of the State Bank of India, the country’s largest lender. (Bhattacharya was, in the early stages, a contender for the coveted post.) However, one major difference between framing monetary policy under Rajan and under Patel will be that henceforth, a six-member monetary policy committee (MPC) which is nearly in place, will fix interest rates. This means that the governor’s say in the matter will be diminished. “With the
formation of the MPC, the government and the RBI will have completed a fundamental institutional reform which modernises India’s monetary policy framework and builds a platform for strong and sustainable growth,” Rajan had said, announcing his last policy.
Those who have worked closely with the media-shy Patel say he is softspoken, but makes his points clearly. At the famed quarterly RBI press conferences, where Rajan used to explain his monetary policy decisions, Patel would flank the governor, chipping in with a view here, a comment there, his manner entirely matter-of-fact. He is unlikely to invite any of the criticism Rajan did, being quite vocal as he was about his views on the economy, which rubbed the government the wrong way on more than one occasion.
Despite this, some businessmen are cautious in their praise for Patel. “If I were him, I wouldn’t look at continuity at all. I would look at the opportunity and play according to it, be honest about my position, and do whatever is right,” says Vallabh Bhansali, veteran dealmaker and chairman of Enam Securities. Arguing for a lowering of rates, he says the new governor should grab the current opportunity, when India is looked upon as a country with high growth potential. “While nobody can argue that India needs to have macroeconomic stability or that it should beat inflation, most countries are battling deflationary pressures,” he says. “The new governor should forget the past and catch on to the potential of India’s moment.”
Patel’s priorities at the RBI will be multi-pronged. Fighting inflation, which stayed high in the past year (CPI inflation touched 6.07 per cent in July 2016, well above the 4 per cent target the government has fixed for 2016-17), is just one of them. Many expect him to sustain Rajan’s drive to clean up the banking system. The outgoing RBI governor has been lauded for his initiatives to fight bad loans, after state-owned banks wrote off Rs 1.14 lakh crore in the past three years. Banks now must classify loans that will potentially turn bad, and provide for these in the books. Propping up the rupee is another challenge. The rupee, which sank to a historic low of 68.83 against the dollar in August 2013 (around the time Rajan took over), had strengthened to 61 by November 2014. But it weakened again, and has been in the 67-to-a -dollar range in the recent past.
UNLIKE UNDER RAJAN, INTEREST RATES WILL NOW BE FIXED BY A SIXMEMBER MONETARY POLICY COMMITTEE, DIMINISHING THE GOVERNOR’S SAY IN THE MATTER
The other expectations of Urjit Patel are a continuation of the financial reforms that Rajan pushed for, like the grant of 23 banking licences to new players (two were given universal banking licences in April 2014, 11 payment bank licences were granted in August 2015, and 10 small finance banks were cleared in September 2015). India had an ‘unbanked’ population of 233 million in 2015 (PwC India report), so this was an important step towards financial inclusion. Another important reform has been allowing banking on tap, which means the bank licensing process will no longer be a once-in-a-decade affair. It will be an ongoing process.
Although there is greater transparency now about the health of the banking sector, it has been dogged by a lack of credit growth. A recent India Ratings and Research survey of investors said 85 per cent felt a further rise in bad loans could put at risk the country’s credit markets and banks’ credit quality. In this regard, Patel would do well to follow through on Rajan’s much-debated asset quality review at banks, albeit by providing a more flexible window to banks to get their credit disbursal mechanisms right. Expectations are high as Patel assumes the mantle at the RBI headquarters on Mint Road, Mumbai. His ability to strike a balance between Rajan’s legacy on the one hand and the country’s growth needs on the other will be subject to intense scrutiny.