Forbes India 15th Anniversary Special

Urjit Patel to be new Reserve Bank governor

Rajan’s unfinished agenda on inflation targeting, banks’ bad loans clean-up main agenda

Salil Panchal
Published: Aug 20, 2016 06:29:36 PM IST
Updated: Aug 20, 2016 08:26:04 PM IST
Urjit Patel to be new Reserve Bank governor
Image: Vivek Prakash / Reuters
Reserve Bank of India headquarters in Mumbai

The Narendra Modi-led NDA government on Saturday announced Urjit Patel as the 24th governor of the Reserve Bank of India (RBI), who takes charge on September 4, when the incumbent governor Raghuram Rajan vacates the post.

"The Appointments Committee of Cabinet has approved the appointment of Dr. Urjit R. Patel as Governor, Reserve Bank of India for a period of three years," said a statement from the government.

Patel will hold the post for three years.

A banker and eminent economist and well versed with the developments at the RBI, 52-year-old Urjit Patel -- the deputy governor at the RBI since January 2013 – was seen as a front runner to the post alongside Subir Gokarn and Rakesh Mohan (both former deputy RBI governors). Others in the race were vice chairman of the NITI Aayog Arvind Panagariya, chief economic advisor Arvind Subramanian, State Bank of India chairman Arundhati Bhattacharya and economic affairs secretary Shaktikanta Das.

Patel, a close aide of Rajan, is seen as an “RBI insider” who has been an architect in strengthening monetary policy framework. He headed the committee through which the Monetary Policy Committee (MPC) was formed. The Urjit Patel Committee had also recommended for inflation targeting and the shift to use consumer price index (CPI), as the main measure of inflation for the RBI, against the previously used wholesale price index (WPI). Both measures have been adopted by the RBI already.

Patel is an economist from Yale University, worked at the International Monetary Fund (IMF) from 1990 to 1995 and been a non-resident Senior Fellow at the Brookings Institution since 2009.

In the previous decade, Patel had worked on several central and state government high level committees relating to taxes, telecom and infrastructure.

Rajan, a former International Monetary Fund chief economist, has decided to return to academics and not pursue a possible second term as governor. In his last monetary policy meeting on August 2, Rajan kept the repo rate – the rate at which the central bank lends to commercial banks – unchanged at 6.5 percent.

Patel is taking charge at a time when the Indian economy is breathing a little easy, three years after Rajan’s term. The Indian rupee, which hit a record low of 68.86 in August 2013, is now stable at near 67 levels; inflation has been tamed somewhat; the current account  deficit has narrowed and growth is at 7.6 percent, the fastest for any large major economy. Foreign inflows into the capital markets have been on the rise.

Expectations are starting to mount for the RBI to cut rates at its next monetary policy meeting on October 4. Patel is also going to be involved in finalising members for the MPC. The MPC, a brainchild of Rajan, is aimed to provide greater transparency to monetary policy decision making, while taking away the onus of interest rate decisions away from the RBI governor.

A rate cut in October, economists say, will make sense as the good monsoon seen this year is helping drive down overall inflation. Also it would assist the push towards a recovery in growth.

Patel’s near hurdle would be to move out of Rajan’s looming shadow and start to create a legacy of his own. Rajan was eloquent, suave and independently minded which made him a favourite with international investors and thus a tough act to follow. This, in some ways, did not make him the most popular. He quit at a time when there were scathing attacks against him from some political circles, led by BJP MP Subramanian Swamy, who has made charges both personal and professional, against the way Rajan has been running the post.

Rajan, who was renowned for predicting the 2008 global financial crisis, was not like many who held the post earlier. When he took charge, a leading national newspaper called Rajan “an economist with rock star appeal” and not many can forget a 2013 write-up by columnist Shobhaa De, in the Economic Times newspaper, gushing over him.
Rajan’s decision to quit came as a surprise to many, when he confirmed to central bank staff via email in June this year: “I am an academic and I have always made it clear that my ultimate home is in the realm of ideas,” Rajan wrote to RBI staff at that time. He is armed with degrees from Indian Institute of Technology Delhi, Indian Institute of Management Ahmedabad and a PhD from MIT Sloan School of Management.

Rajan’s predecessor Duvvuri Subbarao in chats with television channels has called Rajan’s legacy “rich, immense and enduring”, particularly mentioning inflation targeting, the creation of the MPC and pushing for on-tap bank licences.

“The government is trying to bring in continuity in the Rajan way of macro-economic thinking. This is the signal being sent to the bond and capital markets,” said Saurabh Mukherjea, CEO (Institutional Equities) of Ambit Capital. “But the unseen here, is that Patel has no banking supervision experience, it will be interesting to see how he deals with these issues.”

Patel has his work cut out. The government, MPC and Patel himself will want to achieve the target of 5 percent for CPI inflation by March-end 2017 (July 2016 CPI inflation touched a 23-month high of 6.07 percent).

A key programme, the ongoing Asset Quality Review -- initiated by Rajan last year -- which is pushing public and private sector banks to clean up their balance sheets of rising bad loans, will also be monitored carefully till its deadline ends in March 2017. Getting a banking licence has become on-tap but a decision from the RBI to grant one will be a matter of debate at a time not too many banks are financially strong.

Patel will also need to understand that while tough economic decision making will be expected of him; he will need to balance these with delicate, politically sound moves while dealing with the government and the corporate world, which always seeks a lower interest rate regime.