RBI:Buzzword is continuity
Though the proof of the pudding will lie in its eating, that the appointment of Urjit Patel as Reserve Bank Governor has not evoked any significant negative reactions is in itself an achievement of sorts for the Narendra Modi government, hemmed in as it is by criticism on most issues, some justifiably and others unjustifiably.
The markets look unenthused but it is still early days. The expectation is that there would be no major break with the past and the buzzword will be continuity. There can be little doubt that there will be challenges galore for the new incumbent but that his appointment denotes an extension of his predecessor Raghuram Rajan’s time-tested policies should be reassuring to those who fear cataclysmic change.
Unlike Rajan who inherited a tottering economy and had to plunge headlong into policy formulation, Patel can draw satisfaction from the fact that his inheritance is distinctly better with the country’s fiscal and current account deficits under control, the rupee in a relatively stable setting and inflation more or less under check, though at 6.07 per cent annual rate in July it is marginally over the limit of six per cent set by the new statutory monetary policy committee.
With Lady Luck smiling on India with the expectation that on overall calculation this year’s monsoon will prove to be good and consequently an excellent kharif will prop up the economy, the portents are for a happy time on macroeconomic account and a reining in of inflation to acceptable levels in the medium term.
Yet, there is no denying that the new RBI governor will have much on his plate as he settles down in the hot seat. Industry requires generous doses of dynamism to shake itself out of the inertia in which it is bogged down, investment — both foreign and domestic — continues to be sluggish and new jobs are hard to come by. Patel will need to grapple with these problems through innovative and out-of-thebox ways. Low employment generation will doubtlessly affect the Modi government’s prospects in crucial State elections and ultimately in the Lok Sabha polls in 2019.
On the RBI front there is a strong case for lowering of interest rates but any recklessness in this can prove counter-productive. Governor Patel will indeed have to hasten slowly, guarding against the pitfalls along the way. Predictably, the new governor’s main thrust will be the sustained control of inflation and therefore interest rate cut may take a back seat at least for now. Patel would be expected to aggressively clean up the bad debts of banks, a process that began during Rajan’s time with Patel’s full participation. Happily, Patel had something to do with much of the decision-making during Rajan’s time and that experience could come in handy.
The Centre is committed to reform the Stateowned banks and in this Patel’s inputs would be the key. The skill with which he handles this issue will be his big test because he would require a mix of tact and firmness.
Exercise of a measure of independent thinking is not unhealthy in this key position so Patel would do well not to tie himself too closely to the government or to Modi personally. His credentials are impeccable and he must render honest, even if sometimes unpalatable, advice to the powers-that-be so that political considerations do not override economic imperatives.
The Reserve Bank had raised about $35 billion through Foreign Currency Non-Resident Banking (FCNR (B)) deposits in September-November 2013. Most of the deposits are due to mature this year and the central bank has warned that the resultant dollar outflow (about $20 billion) could create temporary liquidity crisis in the market. Raghuram Rajan had opined that it should not be a difficult challenge if managed well. Nevertheless, for the new governor, FCNR (B) deposits remain a daunting challenge that could destabilise the domestic exchange rate and push the rupee towards record lows.
In terms of bank consolidation, the government has already taken the first step by announcing that the associated banks of State Bank of India will be merged with the parent. It also wants to privatise IDBI Bank as a precursor to larger consolidation moves in the Indian banking industry. The new governor will have to oversee the consolidation effectively.
In India, nothing escapes politics. So one cannot help recognising that the decision to appoint Patel could have a positive fallout for the BJP in Gujarat which is in a beleaguered state. The Patels who constitute about 14 per cent of the State’s population and have been traditionally with the BJP are on the warpath and Urjit Patel’s appointment would go down well especially with the educated among them.
Desperate attempts are being made by the BJP to break the unity in young Patel or Patidar leader Hardik Patel’s camp. But it is yet too early to say which way the wind will blow closer to the Assembly elections and what new factors will come into play in the countdown months.
One of the attributes that went in Urjit Patel’s favour when various names were being bandied about for RBI governor was that he is a low profile man unlike Rajan who tended to be flamboyant. Patel kept to his work, speaking very little in public and that is why he remained non-controversial. Now, as he settles down in his new post he will be something of a revelation to those who watch his every move. Whether that would prove good for the system is, however, yet to be seen.
UNLIKE Rajan who inherited a tottering economy and had to plunge headlong into policy formulation, Patel can draw satisfaction from the fact that his inheritance is distinctly better with the country’s fiscal and current account deficits under control, the rupee in a relatively stable setting and inflation more or less under check.