India has said goodbye to a financial “rock star”, to bring in a quiet, trusty technocrat to take charge at its central bank.
As Urjit Patel prepares to assume the role of the governor of the Reserve Bank of India, the message to global investors is clear: Reforms initiated by his predecessor Raghuram Rajan are on track.
For the past three years, Patel, currently RBI deputy governor in charge of monetary policy, has helped Rajan spearhead the biggest reforms to India’s central bank in its 81-year history, including implementing an inflation target and cleaning up bad debts in the banking system.
Patel now faces a number of key challenges.
A new rate-setting panel, ending the current system of the governor making the key decision, is seen deciding on the benchmark at the RBI’s next meeting on October 4, but government has yet to name three external members to the panel. Rajan has transformed the RBI into an inflation-targeting central bank, but the central bank’s latest review may exceed its 5% target for March 2017. Prices rose to a 23-month high of 6.07% in July.
Patel needs to successfully complete a cleanup of more than $100bn of stressed assets on the books of Indian banks with a March 2017 deadline. His takeover also coincides with the maturity of about $25bn in non-resident deposits raised by Rajan in 2013 to support the rupee. The RBI expects about $20bn to flow out and investors fear temporary dollar-rupee mismatches in the banking system.
Patel is taking charge against a volatile global backdrop too. The US Federal Reserve is expected to start raising interest rates, putting pressure on emerging-market currencies.
Patel may be lacking in the global appeal of charismatic Rajan and spent most of the past three years quietly in the shadows of his former boss. The 52-year-old rarely speaks in public and gives few media interviews. But whenever he spoke he did so with conviction.
Patel, who holds a doctorate degree in economics from Yale University, has wide international policy experience. He has worked with the International Monetary Fund as an economist, and for Boston Consulting Group and Indian conglomerate Reliance Industries.
True, the unsavoury events leading to Rajan’s abrupt announcement of his departure has raised questions over the independence of the RBI. But the government has made a good replacement with a message of continuity to international investors. The government now has to respect the independence of the RBI and its new governor.
In a wider sense, Patel’s core challenge, as with every central banker, will stem from the mismatch between growth and inflation. He too will face pressure to loosen monetary policy in an effort to spur growth. But the RBI’s main job is to control inflation.
For that, the experience under Rajan can come in handy for the new governor who, unlike his former boss, reportedly has the blessing of the ruling right wing establishment.
The government now has to respect the independence of the RBI and its new governor
viewpoint
