It’s official. Urjit Patel, one of the deputy governors of the Reserve Bank of India (RBI), is the next governor of the Indian central bank. Patel, the chief strategist and lieutenant of Rajan in the battle against inflation in the last three years will succeed Raghuram Rajan, the outgoing 'rock star' governor of the RBI after his term ends in September, the government announced on Saturday.
The appointment is for a period of three years following the recommendations of financial sector regulatory appointments search committee (FSRASC). Post Rajan's surprise farewell note last month, Prime Minister Narendra Modi had a tough task of getting someone for the post, who could fill in Rajan's shoes with the right mix of intellectual credentials and global acceptability.
The first and big take away from Patel’s appointment is that Modi and Finance Minister Arun Jaitley have chosen the safest best in the crucial post. There are a few reasons why Patel’s appointment is a right decision.
First, Patel has an impressive CV that makes him one of the few candidates who can fight the perception battle of succeeding a governor of Rajan's stature and repute, at RBI. Patel’s experience in dealing with the inflation policy of the central bank and seeing the policy taking shape from close quarters on a daily basis, his vast knowledge of international economy and economic relations make him no less a ‘rock star’ than Rajan in the job profile, though Patel lacks Rajan’s charismatic persona. Patel, like Rajan, too had stints at the International Monetary Fund (IMF) and the Union government. The economist also holds a PhD in Economics from Yale University (1990) and MPhil from Oxford (1986). He has been a non-resident Senior Fellow, The Brookings Institution since 2009. No one will question his academic credentials.
Second, the Modi government doesn’t want any further controversies emerging from the RBI governor or a serious disconnect with the central bank top brass on crucial issues like what happened during the Rajan period. The government had a bitter experience with Rajan on account of the governor’s controversial comments on multiple issues including economic growth, intolerance issue and Make in India like schemes. Patel is perceived to be a silent, friendly figure to Modi government and someone who would ‘keep his head down and work’. That is precisely the government wants, not a governor who oversteps his mandate and comment on politically sensitive issues and become a regular headache to the government.
Third, at a time when monetary policy structure is undergoing a historic shift towards a joint monetary policy committee (MPC) structure, Patel is a safest person to trust the handling of the central bank for the simple reason that he has been instrumental in designing the radical shift. It was based on the recommendations of a panel under Patel that the RBI accepted consumer price index based inflation (CPI) as its core price indicator to formulate the monetary policy and MPC model.
Patel is familiar with functioning of the central bank and his appointment will ensure continuity of the central bank’s policies under Rajan. This is critical, given that the central bank is going through a transitional phase both in terms of monetary policy reforms and banking structure overhaul.
Fourth, like Rajan, Patel too is a familiar and, largely, credible face for the international investors. As mentioned earlier, post Rajan’s surprise exit announcement last month, the government had a task to get someone to replace him with matching credentials and credibility to allay the concerns of international investors. In an increasingly integrated world, investors attach more credibility to the central bank’s voice on the economy than that of the political dispensation. Patel's appointment can help allay the concerns of investors.
That said, Patel’s ability to carry on the reforms process initiated by Rajan, mainly the bad loan clean up process and banking sector reforms, will be evaluated closely and whether he can stand up for the credibility of the central bank at a time when the monetary policy structure is undergoing major changes. Continuing the inflation battle too would be tough task for Patel when the new monetary policy regime kicks in. But the good thing is that government has agreed for the 4 percent inflation target of RBI till 2021. Any deviation from this inflation target, influenced by government to facilitate sharper rate cuts would have jeopardized the inflation fight and sent a wrong signal to the outside world.
On 11 August, Firstpost had reported that Patel is among the three frontrunners for the RBI governor post. Modi government has done well to get a right replacement for Rajan, not taking chances with experiments at the helm of the central bank at a crucial period.