By choosing Raghuram Rajan's trusted lieutenant Urjit Patel as his successor at Mint Street, the Centre has sent two unequivocal messages. One to the market and another to political rivals. And as an unintended consequence, Patel's appointment also exposes some "court intellectuals" and opinion-makers whose public flogging of Narendra Modi on l'affaire Rajan now appears baseless and motivated — just another symptom of their congenital Modiphobia. But more of that later.
The message to the market is clear. As the 24th RBI governor, Urjit Patel will carry forward Rajan's fight against inflation, if anything with even greater intensity. Though a man of few words, Patel's body of work represents clinching evidence that he may be more hawkish on inflation than even his predecessor.
In a 2012 paper during his stint as a nonresident fellow at the Washington-based Brookings Institution, Patel had castigated Indian policy makers and even the central bank for suggesting that global hot money was responsible for inflation in India.
"Assertions that imported inflation and external developments-like global excess liquidity — lies at the root of price developments in India ring hollow… What is clear is that persistence of elevated inflation is agreeable to some policy makers. The authorities want to take credit for India's growth performance but stay blameless on the price front — a case of heads I win, tails you lose!''
Market players believe that the new RBI chief will continue his predecessor's policies because these are largely in sync with his own convictions.
"Urjit Patel's appointment provides continuity to the monetary policy-making, especially around inflation targeting," Nilesh Shah, managing director of Kotak Mahindra Mutual Fund, told Reuters. "It reassures both debt and equity markets of continuity in policy making at the RBI."
Rajan had chosen Patel to come up with the monetary policy framework that's now the cornerstone of India's interest-rate setting mechanism. The creation of a Monetary Policy Committee (MPC), which has now been approved by the government, was led by a recommendation from the 2013 Urjit Patel Committee Report. Under the new MPC framework, the government has formally adopted a consumer price inflation (CPI) target of four percent plus or minus two percent for the period between now and 31 March, 2021.
So for someone who led to the creation of an institutional mechanism to achieve price stability through inflation-targeting monetary policy on interest rates, Patel is just as likely as Rajan to keep inflation closer to 4 per cent in the medium term.
Not just on inflation, analysts expect Patel to also maintain his predecessor's policy of injecting cash through bond purchases and carry forward the work of stabilizing the Indian currency, which underwent a severe crisis in 2013, by frequent interventions.
On banking reforms, another focus area for Rajan, market believes he will adhere to the laid-down process.
"While Patel in his current role has not been directly involved in asset quality review process of bank balance sheets, we expect that he is likely to continue the process of cleaning up of bank balance sheets and adhere to the March 2017 deadline set by Rajan," Goldman Sachs economists noted.
So to sum up, in key areas of inflation, monetary policy, currency stabilisation, cash injections and banking reforms, the new RBI governor is expected to (or at least is likely to, given his concurrence of views) carry forward the same policies that the former adopted. This is important because continuity and stability in central bank policies breed confidence in economy.
But there's an even more interesting political message in Patel's appointment.
In areas of academic excellence and professional pedigree, Patel is every bit as accomplished as Rajan. It could be said that he is even more of a blue-chip western-educated technocrat on account of his years spent studying and working in the US. As Sadanand Dhume says in Wall Street Journal, "Unlike Rajan, whose undergraduate education was in India, Patel was educated entirely in the West. He holds a doctorate in economics from Yale and a master of philosophy from Oxford. Besides working at the IMF, Patel has also been a fellow at the Brookings Institution in Washington."
This is inexplicable.
Ever since Rajan declined a second term, we were repeatedly told by 'public intellectuals' that the man who brought 'sex into Sensex' was "hounded out" because the Narendra Modi government feels mortally threatened by meritorious, foreign-educated technocrats. In op-ed after op-ed of long-winded elaborate nonsense, a point was made that Subramanian Swamy is merely the anglicised alter-ego of Modi and that Rajan's ouster — though was fronted by the maverick BJP Rajya Sabha MP — was actually the prime minister's invisible handiwork. It was seen as clinching evidence of the Modi government's anti-intellectualism and RSS-fuelled belief in nativism.
Just as were getting ready to see a cow vigilante on Mint Street, the Centre unleashed Patel on us.
It is almost as if the prime minister(because he had the last word in appointment) was so taken in by Rajan's international credentials, intellectual heft and monetary policies that after searching long and wide he went ahead and appointed a man who bears similar credentials and could best take forward Rajan's legacy.
If 'mentally fully Indian' was even a small criterion behind choosing the RBI governor, then Kenya-born Patel surely wouldn't have landed the job. After all, he applied for an Indian passport only in 2013 when he was about to take over as Rajan's deputy.
With Arvind Subramanian as CEA and Urjit Patel as RBI governor, Modi has sent the clearest signal yet that foreign education, international credentials and merit are assets, not a liability for a candidate. He has also marginalised the likes of Swamy who made Rajan the collateral damage of his larger battle against Finance Minister Arun Jaitley. Note how Swamy has fallen in line, extending his support to the new appointee via Twitter.
Rajan's replacement also brings delicious irony for the Congress.
Close on the heels of Rajan deciding to step down and return to academia, former finance minister P Chidambaram said he was “disappointed and profoundly saddened” to hear the news but maintained that he was not surprised. “As I had said some time ago, this government did not deserve Rajan. Nevertheless, India is the loser,” he said.
Congress vice-president Rahul Gandhi also chipped in with his informed commentary:
Prime Minister Narendra Modi knows everything. He has no need for experts like Raghuram Rajan
— Office of RG (@OfficeOfRG) June 18, 2016
What will the esteemed former finance minister say now? That India deserves only Urjit Patel?
Because it won't be a stretch to argue that Modi government has adopted a UPA nominee as its own. As Raghuvir Srinivasan points out in Business Line, Patel was a consultant to the finance ministry during Atal Behari Vajpayee’s time apart from being a member in a laundry list of government committees under the NDA and UPA-I, and was appointed to the RBI as deputy governor by Manmohan Singh's UPA 2.
Beyond Congress's politically-motivated insinuations and some silly observation from opinion-makers, what may have gone against Rajan were not his hawkishness on interest rates, rather his frequent speeches as a quasi-public intellectual and frequent courting of media-driven controversies.
It is crucial, however, to stress that Centre did not rule out Rajan's second term and Modi and Jaitley had severally lent public support to the RBI chief. But the choice of Patel indicates that the Centre wants less perceived friction between the central bank in Mumbai and the finance ministry in Delhi.
And it also indicates that more than flamboyance — in 44 months as deputy governor, Patel has one speech to show on RBI's website, compared to 38 for Rajan whose oratory has ranged from Francis Fukuyama's political thoughts to Brexit and tolerance in societies — the government lays greater stress on an ability to keep the head down and do the job.
That can't be a crime.