The Reserve Bank of India’s 24th governor since Sunday, Urjit Patel has his work cut out for him. For the suave, soft-spoken, almost self-effacing technocrat, the legacy of his redoubtable predecessor would at once prove to be a great asset and daunting challenge.
How Patel and his team will work with the government to institutionlise the Monetary Policy Committee (MPC) and draw the boundaries of its remit in practical terms will determine whether the policy’s hard-won integrity and independence will be safeguarded, during his term and much beyond. Analysts and market participants are also curious to watch if and how the MPC, apart from taking decisions on policy rates, would grapple with the new liquidity framework. Under the system announced in April, RBI tends to move closer to neutrality over the medium term on supplying overall durable liquidity needs, even as it addresses temporary needs via its liquidity windows and overnight/term repos and reverse repos.
This apart, two dichotomies the new Governor will have to contend with, perhaps under even more demanding circumstances than Raghuram Rajan, who has just demitted office. One is the tried growth-inflation debate that has come into greater focus after it was reported that GDP growth slowed in the June quarter, and the other is the banks’ hesitation to cut lending rates, which is partly because, as Prime Minister Narendra Modi has indicated in a recent interview, while the RBI’s Asset Quality Review (AQR) has improved the banks’ recognition of NPAs, it has also tightened their capital positions.
Urjit Patel Takes Charge At RBI To Complete… by FinancialExpress
With regard to the first dichotomy, the RBI itself has said in its latest annual report that the country’s economic growth is languishing below levels that it is capable of, with poor capacity utilisation (tepid demand) constricting private investments.
The central bank, however, remains wedded to its gentle glide path to bring retail inflation down to the government-set target of 4% (and make growth sustainable) and has made it clear that room to cut policy rates could emerge only if inflation is projected to fall further. Patel has the unenviable task of having to be ostensibly attentive to the growth imperative (government functionaries like commerce and industry minister Nirmala Sitharaman has of late upped the ante, demanding deep rate cuts) and not digressing from the newly sanctified inflation targets.
The inflation projections, it may be noted, are already “at the upper limits” of RBI’s objective (consumer price inflation hit a 23-month peak of 6.07% in July on dearer food, crossing the 6% upper threshold of its inflation target band). What augurs well for the new governor, who is as much an inflation hawk as Rajan, however, is that a favourable base effect coupled with robust kharif sowing will likely ease food inflation and thereby overall inflation in the coming months, for him to be able to meet the 5% target for March 2017.
On the AQR’s short-term credit-restrictiveness, given that Rajan has listed a speedier resolution of distressed projects and completing the clean-up of bank balance sheets as “work in progress” and on top of his “unfinished agenda,” Patel is sure to stay put and work towards improving the operational efficiency of stressed assets and creating the right capital structure while tightly monitoring the banks in terms of their compliance with the schemes in this regard. Patel will also be keen that new management/owners are brought in promptly in cases where the existing owners tend to fail and try and resuscitate struggling projects with the aid of schemes such as 5/25, SDR and S4A.
When it comes to the financial sector, the central bank under Patel has the immediate challenge of ensuring the steps announced recently to bolster and deepen the corporate bond market have the intended effect. Market analysts in this context have called for long-term structural reforms required for creating the institutional capacity for large issues and said that a deepening of the market and liquidity enhancement would be possible only if various participants and not just banks, purchase these bonds. While the RBI is set to allow brokers to act as market makers and accept corporate bonds as collateral at its liquidity adjustment facility (LAF) operatons, it may also, in coordination with market regulator Sebi, put in place e-platforms for repos in these bonds.
Patel’s short-term challenges also include tackling the redemption pressure concerning the foreign currency non-resident (FCNR) deposits. While Rajan had allowed banks to raise FCNR deposits to battle an all-time low rupee when he had assumed office three years back, Patel will now have to deal with the unwinding of that action. The RBI had allowed banks to raise $25 billion through FCNR deposits in September 2013, most of which leveraged money; it is expected that about $20 billion of that would flow out on maturity by November.