RBI opts for orthodoxy with Urjit Patel

Reserve Bank of India (RBI) Deputy Governor Urjit Patel attends a news conference after the bi-monthly monetary policy review in Mumbai, India, August 9, 2016. Picture taken August 9, 2016. REUTERS/Danish Siddiqui©Reuters

Days after his unexpected decision to return to the US when his term expired, Raghuram Rajan, India’s highly regarded central bank governor, warned his compatriots against the temptation of experimenting with growth-stimulating policies that could feed inflation and undermine macroeconomic stability.

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“Be very wary of economists who say you can have it all if only you try something out of the box,” he said.

As Reserve Bank of India governor, Mr Rajan was criticised by industry groups and some within Prime Minister Narendra Modi’s government for his aggressive efforts to curb inflation — at the expense of economic growth. News of Mr Rajan’s departure sparked fevered speculation that Mr Modi would name a more adventurous successor, willing to take risks to accelerate the economy.

Those expectations were shattered at the weekend, however, when New Delhi quietly announced the elevation of Urjit Patel, the low-key deputy RBI governor in charge of monetary policy, to central bank governor.

Mr Patel is the primary architect of India’s new inflation-targeting monetary policy framework, which ended decades of mixed — and often contradictory — motives driving Indian interest rate decisions, and put the focus explicitly on keeping inflation within a manageable range.

They have chosen someone who, unlike some of the other candidates, has never displayed any form of policy adventurism

– Jahangir Aziz, head of emerging market economics at JPMorgan

With a PhD in economics from Yale University, Mr Patel, who started his career with five years at the International Monetary Fund, is considered a safe pair of hands — someone who will bring continuity to the RBI.

“They have chosen someone who, unlike some of the other candidates, has never displayed any form of policy adventurism,” says Jahangir Aziz, head of emerging market economics at JPMorgan. “He is a very orthodox economist. He is not going to be the one who says, ‘let me sacrifice a little bit of macroeconomic stability to get a little bit of growth’.”

Mr Aziz describes Mr Patel as the “natural successor” to Mr Rajan, and says his selection bodes well for India’s long-term prospects: “The fact that we have so far chosen orthodoxy over unorthodoxy shows that macroeconomic stability remains a top priority for the government.”

Markets are expected to take comfort in the choice, though investors could be slightly uneasy on Monday in light of the fact the new governor is not as dovish on inflation as many had been expecting.

Standard Chartered economists said: “Patel is considered equally hawkish as his predecessor Rajan, if not more so. Thus expectations of significant policy easing are likely to fade.”

Investors will also be watching to see if Mr Patel is as aggressive towards clearing out the bad debts clogging the banking sector, and whether he will maintain Mr Rajan’s target of full recognition and provisioning for bad loans on state banks’ books by March 2017.

Mr Rajan ended the RBI’s long regulatory forbearance but his drive to force lenders to confront their stressed assets drew fierce resistance from state bank officials and politically connected borrowers.

“Investors will look to the new RBI governor to continue the banking sector clean-up with the same urgency,” Standard Chartered said.

Mr Patel takes the RBI helm at time of dramatic change in institutional structures, and as inflation has recently crossed the central bank’s 6 per cent upper comfort limit.

A central bank governor doesn’t need to have a rock star status to be successful in reining in inflation or cleaning up the banking sector

– Thomas Rookmaaker at Fitch Ratings

Until now, interest rate decisions have been the exclusive responsibility of the RBI governor, an arrangement that was seen as potentially leaving an individual highly susceptible to pressure from the government in New Delhi.

Interest rate decisions are soon to be put under the purview of a six-member monetary policy committee comprising three RBI appointees and three government representatives, with the RBI chief casting a vote only in the event of a deadlock.

Pranjul Bhandari, chief India economist for HSBC Securities, said the appointment of Mr Patel’s successor as deputy governor would also be closely watched, as that person will also have one of the crucial seats on the new monetary policy committee.

It remains to be seen whether the committee will be fully constituted by the time of the next monetary policy review in October, or if Mr Patel will take the first decision himself.

As governor, Mr Patel is also likely to keep a far lower profile than Mr Rajan. While his predecessor possessed a towering reputation stemming from his prescient warnings of the 2008 global financial crisis, and won plaudits for helping restore macroeconomic stability and tackle bad debts, Mr Rajan’s outspokenness was seen as a key reason for Mr Modi’s reluctance to extend his tenure.

However, Mr Patel, as part of the system, appears well-positioned to carry on his forerunner’s policy legacy.

Thomas Rookmaaker, director of Asia-Pacific sovereign ratings at Fitch Ratings said: “From a rating perspective, policies are more important than personalities.

“A central bank governor doesn’t need to have a rock star status to be successful in reining in inflation or cleaning up the banking sector.”

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