Being the first RBI Governor in the monetary policy committee (MPC) regime will be a big challenge for Urijit Patel as the government directly, or indirectly, will have a lot of say in deciding the interest rate trajectory. But, his selection by prime minister Narendra Modi as the next RBI Governor should help him in balancing the government’s interests and a sound monetary policy stance.
Being the first RBI Governor in the monetary policy committee (MPC) regime will be a big challenge for Urjit Patel as the government directly, or indirectly, will have a lot of say in deciding the interest rate trajectory. But, his selection by prime minister Narendra Modi as the next RBI Governor should help him in balancing the government’s interests and a sound monetary policy stance.
Prime minister Narendra Modi’s acumen to put the right man in the right place is unquestionable and appointment of Urjit Patel as the next RBI Governor has only cemented this.
By appointing Patel, he has fulfilled all the requirements that needed to be taken care of while appointing the successor of Raghuram Rajan, who will be moving out of the RBI on September 4, including the most important one of continuity in the policy stance.
So, the biggest question now is whether Urjit Patel, first RBI Governor in the monetary policy committee (MPC) regime, will function as the RBI Governor who is not like his predecessor in terms of managing the government interests or not.
What will work in his favour is, he keeps himself away from flamboyance that went against Raghuram Rajan and his capabilities to handle the top job at the RBI also is matchable to anyone who could have been considered for the top job.
In addition, both the domestic as well as foreign investors along with the financial sector and markets will shed any apprehension that they might be having after the government decided not to extend Raghuram Rajan’s tenure as the RBI Governor.
Patel has been a trusted RBI hand already and to that extent, his selection is another masterstroke of PM Modi.
But, it is also equally correct that the job of RBI Governor always comes with an unwritten clause that at times, the RBI stance in managing the monetary policy may not be matching with the government’s short-term policy movements.
And this will be put to test in a big way in the MPC regime, and it will be a formidable challenge for Urjit Patel. How he handles this will be dependent largely on how he manages the backing of PM Modi.
According to the government, the MPC will ‘add a lot of value and transparency to monetary policy decisions’, which will have six members — three Members will be from the RBI, including the Governor, who will be the ex-officio Chairperson, the Deputy Governor, RBI and one officer of RBI — the other three members of the MPC will be appointed by the Central Government, on the recommendations of a Search-cum-Selection Committee headed by the Cabinet Secretary.
These three government-appointed members of the MPC will be experts in the field of economics or banking or finance or Monetary policy and will have a 4-year term.
From a position where the RBI Governor is the unquestionable authority in taking the monetary policy decisions to a system where he will be bound to take into consideration the overwhelming MPC view despite the veto power that he will have in case of a tie, will undoubtedly be a difficult situation for the RBI Governor.
The success of Urjit Patel as RBI Governor would largely be dependent on how he handles this pressure, but one thing is for sure, even if he doesn’t speak much, he has limited option of becoming a puppet Governor — as RBI head, he has to be firm in whatever he thinks is right for maintaining a sustainable monetary policy.