After over two months of uncertainty swirling the office of the governor of the Reserve Bank of India, there is now an almost palpable sense of relief. Urjit Patel, deputy governor in charge of monetary policy, will take charge when Raghuram Rajan departs on September 4.
Monetary Policy Formulation
“Continuity”. Economists are believed to rarely agree on anything, but in this case the verdict on the announcement was unanimous. The economists BloombergQuint spoke to all believe that Urjit Patel was the best placed to carry forward the policies that have been put in place by the RBI over the past three years.
I think he sat, not in the driver’s seat, but near the driver when it comes to monetary policy formulation for the past three years, so it’s a good choice.Abheek Barua, Chief Economist, HDFC Bank
We are all very happy at RBI. We have been working together, and it will provide much-needed continuity and ensure a very smooth transition. Dr Patel has been in the RBI which will ensure that there is a business-as-usual approach from day one, and that there are no gaps.SS Mundra, Deputy Governor, RBI
As Deputy Governor of the RBI, Urjit Patel has been instrumental in formulating the policies that are currently being followed by the RBI. The committee that he headed recommended not just the inflation targeting framework for monetary policy, but also the setting up of the Monetary Policy Committee.
Since those recommendations were made, the government and the RBI have entered into an agreement, whereby the RBI will tweak monetary policy to ensure that consumer price inflation is kept within a 4-percentage-point band, with 4 percent as the median.
The implementation of these recommendations is what saw the policy rate retained at 8 percent for nearly a year during Rajan’s tenure as governor; a move that brought consumer price inflation down from double digits to more acceptable levels.
On account of his role in putting in place the current monetary policy framework, Patel is viewed as an inflation hawk, a moniker that was also borne by his predecessor Rajan. But Barua believes that a lot of people, including many in the corporate sector, will breathe a sigh of relief because there is expected to be no change in the RBI’s functioning.
Relationship With the Government
Over the past two months, a lot of the dialogue that took place with regard to the appointment of the new RBI governor was on whether the individual would be close to the establishment.
Sabnavis believes that there will now be no doubt as to whether the new governor will be “independent”.
Patel does have a strong relationship with the government. And healthy coordination and occasional conflict is good. It was the case with Rajan, and it will probably be the same now,” said Barua.
How Will Markets React?
Most believe that both equity and bond markets will react positively to the appointment of Patel as RBI governor.
But while the equity market is expected to give Patel a thumbs up on Monday, there are some that expect a slight blip in the bond markets.
“I’m not too sure (about a positive reaction by the markets). I think in the bond market there was an implicit belief that the successor would have a slightly more dovish view on interest rates. There were people who had that view and as a result there could be a slight uptick in the bond yields,” said Abheek Barua.
The 10-year government bond yield ended 0.04 percentage points at 7.1020 percent.
Also Read: Inflation Hawk Like Rajan; Will Actively Take up Inflation Targeting: Economists on Urjit Patel
What Next?
All eyes will now turn to the appointment of a deputy governor in charge of monetary policy, the role Urjit Patel will vacate on September 4. The appointment is significant, because this deputy governor will find an automatic place on the Monetary Policy Committee that will soon be put in place.
The RBI will meet on October 4 to review monetary policy for the fourth time this year. The latest data on consumer price inflation shows that it jumped higher in July to 6.1 percent, marginally above the RBI’s comfort zone, and a full percentage point above the target for the end of the financial year.
And while this was an expectation that was built into the RBI’s last monetary policy review in August, both market participants and economists will now watch for the RBI’s guidance in October, by which time, presumably both Urjit Patel and the Monetary Policy Committee will have hit the ground running.
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