New RBI Guv faces big challenges
Cleaning up the Indian banking system and checking retAil inflAtion Are two immediAte chAllenges.
and corruption, it would indeed lend its support to Urjit Patel in the same way as it did in the case of Rajan. A large quantum of bad loans with the government owned banks has severely restricted banks’ capacity to finance the economy when it is most urgently required.
The second big challenge before Patel would be to honour the RBI’s own mandate of controlling retail inflation which currently stands at over 6%. The gov- ernment, along with the RBI, has agreed to keep medium term target of retail inflation at 4% (with 2% deviation on either side). “But such targeting of inflation would require cooperation between the government and the RBI,” Nath said. Inflation in India is primarily driven by poor supply-side response rather than being demand-based. So the expectation from the government to deftly manage the supply side is indeed very high. The GST is likely to play a positive role here. This path-breaking reform is expected to boost the supply side management by facilitating greater movement of goods from the surplus to the deficit regions of the country. But Patel’s firm belief that interest rates and money supply are indeed the effective tools to fight inflation, might make him conservative as far as reduction in interest rates is concerned. Rajan’s continued focus on inflation has helped India tame the menace to a large extent, but it still stands 1% above the 5% target set for March 2017.
Whether the new governor can withstand the pressure to reduce interest rates would also be keenly observed by all. He would be heading the first ever meeting of the Monetary Policy Committee, constituted recently to decide the interest rates, an authority which hitherto had been the sole prerogative of the Governor. Analysts feel that since interest rates would be henceforth decided by this multi-member committee, the credit or the criticism for holding on to a particular rate of interest would now be shared by all members of the committee.