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Find balance between inflation and growth is task before Urjit Patel
By R.C. Rajamani. Dated: 8/26/2016 11:30:01 PM
Government has finally ended its two-month long intense search and zeroed in on distinguished macro economic expert Urjit Patel for the critical post of Governor of the Reserve Bank of India (RBI) to succeed the redoubtable Raghuram Rajan who demits office in the first week of September.
Patel, 52, a Deputy Governor since January 2013, will take over as the 24th chief of India's central bank on September 4. A look at Patel's credentials will throw some light on why he has been chosen from a short list of equally eminent economists and bankers. Patel was first appointed on 11 January 2013 as a deputy governor to replace Subir Gokarn. He was reappointed as deputy governor in January for another three years. He has steered the monetary policy department since 2013 and has worked closely with Rajan at RBI.
Patel headed a committee that introduced changes including a switch to inflation-targeting and adopting consumer prices as the new benchmark instead of wholesale prices.
Patel is a PhD (economics) from Yale University (1990) and MPhil from Oxford (1986). He has been a non-resident Senior Fellow, The Brookings Institution since 2009. Patel has also served the government in various positions during the NDA-I regime. During 1998-2001, he served as a consultant to the ministry of finance, department of economic affairs.
Significantly, two days after choosing Patel, the Narendra Modi government expressed optimism that he will strive to strike a balance between inflation and economic growth.
The government said that it is confident that the Governor-designate will "rise to the occasion" and use his experience of handling monetary policy at RBI to maintain a balance between inflation and economic growth. Alluding to his background in monetary economics, it hopes Patel will keep in mind the requirements of monetary policy and the inflation target that has now been laid out in the RBI Act. It is also optimistic that Patel will also balance the requirement of growth which is in fact the mandate as per the amended RBI Act.
The government has set an inflation target of 4 per cent, plus or minus 2 per cent, while consumer price inflation soared to 6.07 per cent in July. RBI's next monetary policy review is due on October 4. The government's comments are a clear indication to its mind and what he expects of the new RBI chief. In other words, Patel has his task cut out - ensure growth and control inflation. A big challenge indeed.
By all accounts, Patel shares his predecessor Rajan's mindset on monetary policy. Thus, it is reasonable to expect the new man to follow the straight and narrow path of monetary prudence conscientiously taken by Rajan in the face of a constant clamour for liberal policy rate cuts.
It is important to bear in mind that the job of the RBI governor is not just monetary policy. The Central bank chief is also the regulator of banks and NBFCs. Thus he has to ensure smooth functioning of financial sector and he also to look into flow of credit to various sectors, particularly the requirement of agriculture and MSME sectors.
It is worthwhile looking back at what Rajan has striven and achieved during his 3-year tenure.
In his last review meeting in early August, Rajan held RBI's repo, or short-term lending rate, at 6.5 per cent. Since January 2015, he has cut lending rates by 150 basis points (bps) but banks have only cut their interest rates by about half of that. He also announced a shift to the marginal cost of lending (MCLR) regime in a bid to persuade banks to pass on the benefit of rate cuts to end users of the banking system.
Under the MCLR, banks need to reckon their marginal cost of funds, or the cost incurred on incremental deposits across different maturities, to decide on interest rates. Sadly, even three months after the MCLR was launched on April 1 this year, banks have hardly cut their lending rates. ICICI Bank and Axis Bank recently cut rates by only 5 bps. So far, Axis Bank has cut its rates cumulatively the most -- by 30 bps. State Bank of India, ICICI Bank, HDFC Bank, Bank of Baroda, IDBI Bank, Punjab National Bank and Syndicate Bank have cut their rates only in the range of 5bps -- 20bps.
Public sector banks argue that their accumulation of massive non-performing assets (NPAs), or bad loans, is impacting profitability and is a severe constraint on their ability to cut rates.
Patel is also known for his opposition to government capital spending at the risk of a higher fiscal deficit.
After Rajan held rates in the February 2015 review after making an unexpected rate cut the previous month -- the first in nearly two years, Patel had spoken of the "important backdrop" to Rajan's move.
"We are in the midst of the age of competitive depreciation and of a beggar-my-neighbour philosophy. It brings to mind an old African saying that when elephants fight, the grass suffers. While the ECB (European Central Bank) and the Bank of Japan are printing money and devaluing their currencies on one hand, the US economy is reviving on the other. Anyone in the middle is getting crushed."
Essentially a macro economist, Patel will be more concerned about achieving sustainable long term growth. He is not expected to go for the quick fire guerrilla attack to produce exciting short term targets of growth which cannot be sustained beyond a point. But this is what corporate India and some hot heads in both public sector and private banks have been trying to advocate with little success thanks to the sober heads that have steered the ship of RBI out of the choppy waters of an increasingly uncertain global economy. No doubt, monetary conservatism has in the main saved Indian economy from the global financial crisis of 2008. It is the same policy that had earlier insulated Indian economy from the adverse effects of the collapse of the so called 'tiger economies' of the East.
So, it is reasonable to expect Patel to bat in copy book style, sedate and safe, when he begins his innings at the Mint Street on September 4. He will be largely guided by the philosophy of his immediate predecessor Rajan. Best of luck to Patel.
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