24th RBI governor is an inflation warrior with a corporate background
Ending months of suspense and intense speculation — and exactly two months after incumbent Reserve Bank of India governor Raghuram Rajan announced he will not seek a second term, though he had remained open to completing an ‘unfinished agenda’ — the Narendra Modi government on Saturday anointed his successor, 52-year-old Urjit R Patel, currently deputy governor at RBI, and a former IMF hand. Patel will head the country’s central bank for three years beginning September 4.
Analysts said Patel’s appointment — which the government stressed, was the result of “a systematic approach and an objective mechanism put in place the first time” for the section of the central bank governor —showed the government’s intent to ensure continuity of the policy priorities set during Rajan’s three-year term.
As the RBI’s 24th governor, Patel’s tenure coincides with the incipience of the Monetary Policy Framework which makes the governor — who is now kind of sole arbiter in setting interest rates — one of its six members, although with second vote to exercise in case of a tie. He will also be the first governor to oversee a regime of formal inflation targeting, jointly put in place by the government and the central bank, defining price stability as the primary objective of monetary policy. The government has now formally adopted a retail inflation target of 4% plus or minus 2% for the period between now and March 31, 2021.
As Rajan’s inflation warrior, Patel, incidentally, was at the helm of institutionalising the new regime — a committee headed by him mooted the concept, detailed it and expounded on its desirability. As he takes over, however, the inflation stands above the 6% top range set by the government on a rise in food prices, although most analysts say it could cool and would be below 5% by March 2017.
Patel will be among the few with a corporate background to become RBI governor, the top post at Mint Street that has been previously held by mostly career bureaucrats or economists at academic institutions. He was with IMF between 1990 and 1995, during which he worked on the US, India, Bahamas and Myanmar desks. Later, he was on deputation (1996-1997) from the IMF to the RBI, before becoming a consultant (1998-2001) to the ministry of finance. Patel joined the central bank on January 11, 2013, months before Rajan took charge as the governor, and had been heading the monetary policy department.
Like Rajan, Patel has a doctorate in economics from Yale University. He did his MPhil in economics from Oxford University in 1986 and BSc (economics) from University of London in 1984.
Rajan, a former IMF chief economis, had recently said his inflation-focus approach helped halve inflation and allowed “savers to earn positive real interest rates on deposits after a long time”. Even as he came under scathing attack by many, including vitriolic commentary by BJP MP Subramanian Swamy, who thought he failed to back the government’s efforts to boost economic growth, Rajan has been firm on his course. His comments that infringed upon the political arena— like the ones on intolerance —and particularly, his description of the Indian economy as sort of a “one-eyed king” in the land of the blind, had ruffled many feathers, prompting views that the government started rethinking on giving him second term (he was appointed for a three-year term in September 2013). Rajan’s own comments later gave credence to this perception—he said lately that his discussions with the government never reached a stage that he could continue.
He made banks recognise their bad debts and also nudged them on several occasions to pass on the benefits of cut in the repo rate to borrowers. Rajan’s role as the saviour of the rupee has also been appreciated. The domestic currency survived the aftermath of the easing measures and the first interest rate hike by the Federal Reserve in around a decade in December 2015.
While the Economic Survey 2015-16 authored by chief economic adviser Arvind Subramanian suggested that the RBI’s capital could be used to infuse funds into state-owned banks and help them recognise losses on bad assets and step up lending, Rajan denounced the idea, warning that if implemented, it could get the banking regulator once again into the business of owning banks, with attendant “conflicts of interest”.