Seven Things We Can Expect From New RBI Governor Urjit Patel
Media commentators are known to follow a herd mentality, and there are times one sees that happen. When Dr. Urjit Patel’s name was announced as the new Reserve Bank of India Governor, we came across descriptions like “low profile” or that we don’t know much about him since he has “rarely spoken” his mind on many issues. While most commentators agreed that he is the best choice in the current fiscal-monetary policy context, there were apprehensions in some quarters. After all, he’s the one who has to step into the illustrious shoes of outgoing governor Raghuram Rajan.
In order to read tea leaves, I went back to listen to an interview he had given me in July last year. I also went through selected searches thrown up by Google and scanned the RBI website. The results showed me that he has spoken or written (working/research papers) on 15 occasions in the last 30 months. He interacts but does not speak unnecessarily. The news junkies who are hoping for Dr. Patel to make sweeping statements on crony capitalism at news conferences during his time as the RBI governor will be disappointed.
Keen China Watcher
So who is Dr. Patel? We know that he is from Yale and Oxford, and has served at the International Monetary Fund. He has been portrayed as a strong proponent of the western economic policy model. The assessment, as far as I know, may not be entirely accurate. Dr. Patel, undoubtedly, has had good exposure to the global financial system, but he has been critical of the now corroding western financial architecture.
In the interview I conducted in July, he had emphasised the need for structural reforms and new adjustments by global central bankers and institutions. He had advocated that multilateral institutions should act like honest referees and prevent central bankers from indulging in competitive devaluation of their currencies. He had also highlighted how the emergence of Asia-focused institutions like the Asian Infrastructure Investment Bank, and the New Development Bank have added a whole new dimension to the global financial system.
His speeches give us a clear sense of what he stands for. He is not obsessed with the United States. He is a keen China watcher and knows, perhaps better than most, how an accident in that economy may have serious consequences on our shores. His papers have focused on the challenges faced by emerging market economies in ushering in an effective monetary policy regime.
Expect A New Inflation Measurement System
A lot of credit has been given to Raghuram Rajan for steering India’s monetary policy deftly. But do remember, as deputy governor, Dr. Patel has been driving this department for the last four years.
Going by his observations on various issues, I can hazard a guess on how he will handle short-term and medium-term challenges.
Inflation: He will stay data-dependent while deciding the interest rate. He will have to set up and follow the new Monetary Policy Committee system here. However, to borrow from Janmejaya Sinha’s suggestion, he may tweak the way we measure inflation. The consumer price index-based inflation measurement is neither accurate in capturing different economic groups and regions, and their food consumption patterns, nor is it in sync with standard global methods. A new system may give the RBI much more headroom in staying with its inflation target.
Interest Rate: According to the prevailing wisdom, Dr. Patel is expected to carry forward Rajan’s legacy. My sense is he may be a bit bolder in balancing the interest rate with the need to spur growth. U.S. Federal Reserve Chair Janet Yellen’s moves may be the key input in this regard. Don’t forget, he will have to make the adjustment rather quickly.
Bad Loans: I expect him to be quite aggressive on this front. The bad news was driven home a bit adventurously. I expect Dr. Patel to take the process to its logical conclusion with full transparency. He will have to do this quickly and on a case-by-case basis. With his expertise on infrastructure, stakeholders are hoping that he will face the challenge of declogging India’s stalled projects head on.
PSU Banking Reform: From credit offtake to staying competitive, India’s PSU bank reform is also an unfinished agenda. He will have to go in for structural changes here and dispense with the band-aid solution type of approach.
Exchange Rate: Due to reasons of political perception, the government would like to see the rupee strengthen, but there really is a case for further depreciation. Dr. Patel will have to at least maintain the domestic currency at similar levels, and find a sweet spot between 65 and 70 rupees to the dollar.
Financial Inclusion: This is going to be the most interesting space to watch. Financial inclusion is the Modi government’s foremost agenda and the RBI under Dr. Patel will be expected to push it further.
Last Mile Connectivity: With the digital revolution already engulfing us, connecting the unbanked, directly benefiting the needy, lending to micro and small businesses, lending without collateral based on big data, and making society cashless – these are the next frontiers. This is where Dr. Patel will have to deliver a lot, to the economy, and to his employer – the government.
(Sanjay Pugalia is the Editorial Director of Quintillion Media)
