Urjit Patel, who replaces Raghuram Rajan as the Governor of Reserve Bank of India from September 5, is likely to continue the central bank’s focus on bringing down inflation, clean up the bank balance sheets and infuse sufficient liquidity into the system.
His elevation from the role of deputy governor of the central bank is an affirmation of the Centre’s commitment to the new monetary policy framework and continuity in RBI.
Patel is the architect of the current monetary policy regime and the target range of CPI inflation of 4% +/- 2% until Q1 2021 has been accepted by the government.
In addition, RBI outlined in its latest monetary policy statement that it aims to bring headline CPI inflation down to 5% by March 2017. Retail inflation rose to a 22-month high of 6.1% in July, led by the pick up in food prices. However, with normal monsoon, food inflation is likely to cool down in the next few months and economic growth should pick up.
The new governor also has to carefully navigate the banking landmine of non-performing assets (NPAs).
In fact, aggregate stressed loans—the total of NPAs and restructured debt—for banks grew to 12% of total assets in June, from 11.4% in March this year.
State-owned banks reported the highest level of stressed advances at 15.4% in June, up 100 basis points over the March quarter.
Patel is likely to continue the process of cleaning up of bank balance sheets and adhere to the March 2017 deadline set by Rajan.
Starting next month, the interbank liquidity could be affected by the maturing of $34-billion FCNR(B) deposits as the central bank had opened the swap window in September-December 2013 to stabilise the rupee.