It wasn't the 0.25 percent rate cut, but the way governor Urjit Patel presented himself that caught the attention of many who watched the Reserve Bank of India (RBI) monetary policy press conference, on Tuesday afternoon, at the central bank's Mumbai headquarters.
Patel appeared not too keen to go into the details of the underlying thought process that went into the monetary policy assessment. Unlike most of his predecessors at the post, often, he was seen restricting his words to the specifics -- the macroeconomic rationale that led to the unanimous decision of the newly formed six-member Monetary Policy Committee (MPC) to the rate cut.
Patel appeared more like a spokesperson who would read out the MPC statement.
Journalists, who were waiting to see the new RBI governor make a new personality statement, were clearly disappointed. Ever since Patel took over charge from Raghuram Rajan in the first week of September, he has never met the press or public, a marked difference from RBI governors of the past.
To some, even the rate cut was a surprise, given that Patel, in the capacity of Rajan's deputy, was always seen as an extremely cautious, more 'hawkish' than Rajan himself when it comes to lowering the guard on central bank's long fight on inflation. But, contrary to expectations, Patel announced a rate cut on Tuesday, even while stating the persistent upside risks to inflation and seemingly reflecting the Narendra Modi-government's view that inflation is easing and, hence, growth is the primary economic priority now.
How much of this policy is from Patel and how much of it is from other members in the MPC, will be known only when the details of deliberations at the MPC meeting will be published on 18 October, provided there will be details. But unlike Rajan, who ignored the rate cut calls from government cautioning inflationary risks, Patel seems to be favouring growth, also contradicting his own stance in the past. Remember, the Narendra Modi government had clearly indicated that it wants a rate cut as evident from the comments of Finance Minister, Arun Jaitley, and other ministers in the government and bureaucrats. Patel has announced just that.
Couldn't the MPC have waited till December by when it would have more data on inflation? We have seen only one month of sharp decline in CPI inflation (5.1 percent in August) after a rise in July (6.07 percent). There's no trend of a steady declining inflation yet. One should note that the MPC chose to cut rates simultaneously highlighting persisting risks on the inflation trajectory from the demand side on account of "cost push pressures that may emerge, including the 7th pay commission award on house rent allowances, and the increase in minimum wages with possible spillovers through minimum support prices."
Also, it noted that the fuller play of these factors will need vigilance to prevent a generalised cost spiral from taking root. The question is: If the RBI is so vigilant and concerned about the upside risks, why a rate cut now?
At the post-policy conference of the RBI, Patel hardly engaged with the audience. At 3 pm, at the end of his 15-minute interaction, the governor put a sudden end to the presser, thus sending a message to the reporters they shouldn't be expecting fireworks from him at RBI pressers for the next three years. That Patel would be brief to the point--just like how Prime Minister Narendra Modi and his government wanted the new RBI governor to be after Rajan's controversial stint. The 15-minutes of interaction with the governor reminded one of those short engagements typically conducted by one of the top government bureaucrats while putting out a brief on a government policy decision.
It's not just the absence of witty one-liners or occasional jokes -- the hallmark of a typical Raghuram Rajan presser that was missing on Tuesday. The bigger question is: Will Patel take a U-turn on the two critical issues the central bank pursued vigorously during the Rajan era---an inflation-centered policy approach and the future course of bad loan clean-up exercise. If one reads between the lines of Tuesday's policy statement, there are signs of growth overtaking inflation as the bigger priority, though it is admittedly early to conclude a change in stance.
Though there were no explicit comments from Patel so far about a rethink on these issues from the central bank's stated path, banking industry sources said there may be a digression in the part of the central bank from the ongoing bad loan clean-up process under Patel. Remember, Rajan's harsh deadline of March 2017 for banks to clean-up bank balance sheets was met with considerable resistance from a section of banks and the crony capital mafia, who were misusing the banking system--especially the public sector banks--for long.
True, it isn't wise to judge an individual too soon. But, central bankers' communications have always been as important as their actual policy actions. The world has always scrutinized every word and every gesture from them for cues to assess what is the approach of central bank on larger issues, for the simple reason that the central bank of a country is equally important as the elected government when it comes to matters pertaining to financial stability in the economy.
Patel's first presser as the governor, his policy statement and his comments gave no signal that he would stand up to guard the autonomy of the central bank for which his predecessors fought hard. At best, he appears to be a consensus man. That's okay. Not everyone will be the same. But the danger is if Patel chooses to take a step back from this course---especially on the bad loan clean-up issue and inflation control-- it could, in turn, take the banking system a step back in time. The memories of a dark age of gross misuse of public money by cronies and crooks are still afresh.
The short point is this: Patel's 15-minute long presser on Tuesday offers too many clues as to what one could expect in the next three years from the central bank governor--a governor who would want to be in the good books of government, rather than someone who would want to antagonize the political establishment for RBI's priorities. Of course, Patel can prove this notion wrong going ahead. But on Tuesday, at his first monetary policy conference, Patel was everything his predecessor Raghuram Rajan wasn't--the kind of the governor PM Narendra Modi always wanted at RBI's helm.