Urjit Patel may not be a flamboyant RBI Governor like Raghuram Rajan, but he has displayed that he can effectively balance the monetary policy management with the government’s interests. But his real challenge is to show that he can guide the NPA resolution in an effective manner with the government now empowering the RBI for this.
Like many of the earlier Reserve Bank of India (RBI) Governors, Urjit Patel doesn’t believe in being in the limelight, but that doesn’t mean he is less capable or a weaker handler of the RBI affairs than his predecessor Raghuram Rajan.
In fact, besides the continuity in the monetary policy domain since Patel’s elevation from the Deputy Governor to Governor after Rajan’s exit in September last year, has also meant that the uneasy relationship between the Central Bank and the government since the change of guard at the Centre with NDA government coming to power in May 2014, is no more the talk of the town.
This doesn’t mean though that Urjit Patel is not his own master and is going along with the government’s view all the time — the RBI is as emphatic in protecting a strong monetary policy stance, even under the Monetary Policy Committee (MPC) regime, as ever, which is clearly evident from the RBI’s aversion to a reduction in the interest rate without getting a clear picture of the external and internal risks, including inflation, that will depend on monsoon along with other factors.
Patel, who assumed charge as the twenty-fourth Governor of the RBI since September 4, 2016, has also not shied away from cautioning the government on waiving farm loans despite knowing that it was a big promise in the Uttar Pradesh assembly polls that Bharatiya Janata Party (BJP) won emphatically with Prime Minister Narendra Modi as its star campaigner.
The latest monetary policy statement of the RBI on April 6 pointed out categorically, “The general government deficit, which is high by international comparison, poses yet another risk for the path of inflation, which is likely to be exacerbated by farm loan waivers”.
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There is also no pause in persuading the banks and the government to tread a realistic path on interest rates. At the MPC meeting of April 5-6, Patel said, “Demonetisation induced liquidity facilitated faster monetary transmission. There is still room for banks to cut lending rates. For efficient transmission, it is important that interest rates on small savings are not out of line with interest rates on other comparable instruments in the financial system”.
It is true that the RBI did appear confused at times in the handling of the implementation of the demonetisation of Rs 500 and Rs 1,000 notes during November 8 to December 30 last year.
It is also a fact, however, that the whole process being closely guarded till the last moment and people opting for all kinds of methods to deposit old Rs 500 and Rs 1,000 notes, all the agencies including RBI, handling it, found it hard to cope with the situation.
A distinct element in the current RBI functioning is that the bank under Patel has avoided creating any unnecessary problem for the government — not disclosing the actual amount/percentage of old Rs 500 and Rs 1,000 notes that has come back to the system may be seen as the apex bank trying to save the government from embarrassment.
But, there is no harm in RBI and government co-ordination if it is delivering the required results without compromising the former’s independence.
The ordinance to resolve the tricky NPA situation may be one of the biggest successes of Patel in this backdrop.
With all existing windows failing to deliver, the RBI needed powers to simultaneously force and protect the banks in starting an effective NPA resolution process.
That the government has amended the Banking Regulation Act to empower RBI for an effective handling of the worsening bad debt situation in itself shows Patel’s unwavering persistence in removing the bottlenecks such as the absence of a time-bound resolution enforcement mechanism and protection of the banking officials from unnecessary questioning of their decisions in the commercial interest of the banks.
His tenure of eight months as RBI Governor shows that he has successfully come out of the shadow of Raghuram Rajan, but it is his success in delivering the required results in handling of the NPA situation, that will to a large extent show whether he turns out to be a great RBI governor or not.