Continuity in Reserve Bank of India’s policies with a renewed focus on inflation management would be the central theme of Urjit Patel who will take over as the Central Bank governor on September 5.
The focus on inflation, especially in the wake of recent data that shows that retail is trending above RBI’s upcoming 5% target, is likely to dim hopes of a rate cut, as the market believes Patel is equally conservative, like Rajan.
The government recently accepted the RBI’s inflation target of 4%. But in July, consumer price index (CPI) inflation stood at 6.07%, a two year high, mainly due to high food prices.
Economists believe that RBI’s approach, given that Patel has been a deputy governor closely involved in inflation targeting, show that for the near term, a negative impact on rates is more likely.
“Patel is considered equally hawkish as his predecessor Rajan, if not more so. Thus, expectations of significant policy easing are likely to fade. However, the market is likely to take comfort in likely policy continuity on major issues, including inflation targeting. Patel played a pivotal role as the RBI redefined itself as an inflation-targeting central bank, adopting CPI (instead of wholesale price index) as the anchor for monetary policy in early 2014,” said a Standard Chartered report.
The market is also expected to closely monitor Patel’s replacement, since the RBI deputy governor is one of the three members from the RBI on the Monetary Policy Committee. The committee currently has RBI governor Rajan, RBI executive director Michael Patra as nominees.
The staus quo in policies was the recurrent theme hailed by bankers. “Patel has been at the helm of institutionalising the inflation targeting regime in the monetary policy framework. His appointment signals continuity of policy intent, both on part of RBI and the government,” said Arundhati Bhattacharya, chairman, State Bank of India and reportedly one of the contenders for the job in the run-up to the final appointment.
Echoing the SBI chief’s views, ICICI Bank MD and CEO Chanda Kochhar said Urjit Patel has played a key role in developing the new monetary policy framework that has focused on reigning in inflation and has imparted stability to the currency. “His appointment would ensure a smooth transition and continuity in monetary policy, as India puts in place major structural reforms to transition to a higher growth path.”
Patel’s involvement with the monetary policy committee makes him “best suited to take the policy agenda forward. Being an architect of the new policy framework, he retains high credibility for monetary stability and also combines the strengths of a global perspective and a solid academic background. His expertise in fiscal policy will serve as a bridge between RBI & government,” said Shikha Sharma, MD of Axis Bank.
Incumbent Raghuram Rajan’s efforts to develop new category banks, is another area. “Mr Patel, who has already been a deputy governor of RBI for the last three years, is one of India’s most respected economists with superb credentials to lead one of the best managed central banks in the world,” said Vijay Shekhar Sharma, founder and CEO, Paytm. “I am sure he will have an extremely successful tenure and we will have a period of high growth, low inflation and macro-economic stability in the coming years.”
Rahul Bajaj, chairman of the Bajaj Group and an outspoken industrialist indicated industry’s expectation of growth. “I am confident that Mr Patel’s decisions regarding interest rates, monetary policy, cleaning the NPAs of banks will be balanced keeping in mind the circumstances prevailing from time to time. I am not one of those who keeps harping on lower interest rates though my customers in my companies like Bajaj Auto and Bajaj Finance would naturally stand to benefit. While we naturally need higher growth, inflation hurts everyone, especially the weaker sections of society and also the corporate sector,” Bajaj added.
Bank Board Bureau chairman Vinod Rai said it was “an excellent choice and he can hit the ground running. He is familiar with the situation and has a great understanding of the economy and there is absolutely no doubt that things will be handled extremely well.”