There wasn’t really any surprise when the government, early this week, chose to reappoint Urjit R Patel as the deputy governor of the Reserve Bank of India (RBI) for another three years. Patel’s continuation at the central bank’s top brass is most warranted at a time when the country’s monetary policy framework is undergoing radical changes. And Patel is credited as one of the main architects of re-engineering the RBI’s monetary policy structure as we knew it until then.Patel, also a close confidante of RBI governor Raghuram Rajan, was instrumental in reshaping India’s monetary policy targeting inflation control. It was based on the proposals of a panel headed by Patel, the central bank began focusing primarily on the retail inflation (consumer price index-based inflation) for the purpose of monetary policy formulation. Until then, the whole attention of economists and financial markets were on wholesale prices index inflation (WPI).
The RBI moved into a formal inflation-targeting process between the government and RBI in line with the recommendations of the Urjit Patel panel. On 20 Feburay 2015, both the RBI and the government signed an agreement under which a joint monetary policy panel comprising of the RBI and government representatives will set the inflation target and the RBI will work towards achieving this by adjusting its policy rates.
Going by the contours of the agreement, the Reserve Bank will aim to bring inflation below 6 percent by January 2016 and to around 4 percent in another year. Patel, who first took over as RBI deputy governor in January 2013, was among the chief architect of the new structure. He has served as an advisor with Boston Consulting Group prior to this. An economist by profession, the 52-year-old has a BA from London School of Economics, a doctorate in economics from Yale University and an MPhil from Oxford. Patel was also a non-resident Senior Fellow, The Brookings Institution since 2009.
Debate on inflation targeting
There has been a fair bit of disagreement among a section of economists and central bankers on whether India should move to inflation targeting at this juncture, especially in a regime where the inflation target will be set by a panel, where the government too has a significant say.
One of them was former RBI governor D Subbarao, who had strongly opposed adopting inflation targeting as a formal policy stance, saying "inflation targeting is neither feasible nor advisable in India" for several reasons. “In an emerging economy like ours, it is not practical for the central bank to focus exclusively on inflation oblivious of the larger development context. The Reserve Bank cannot escape from the difficult challenge of weighing the growth-inflation trade off in determining its monetary policy stance,” said Subbarao in a 2011 speech.
Subbarao also highlighted two other factors that could go against the idea of inflation targeting. One: “The drivers of inflation in India often emanate from the supply side, which are normally beyond the pale of monetary policy. In particular, given the low income levels, food items have a relatively larger weight in the consumption basket in India compared to advanced economies and even many emerging market economies. Monetary policy, as is well known, is an ineffective instrument for reining in inflation emanating from supply pressures.” Second: “A necessary condition for inflation targeting to work is efficient monetary transmission. In India, monetary transmission has been improving but is still a fair bit away from best practice.”
But, the central bank and the government chose to go ahead with the Patel panel recommendations.
Patel, who has immense experience in the financial world, has served the International Monetary Fund (IMF) between 1990 and 1995 and worked on the US, India, Bahamas and Myanmar desks. Earlier, he has also worked on deputation from the IMF to the RBI to advice on development of the debt market, banking sector reforms, pension fund reforms, real exchange rate targeting and evolution of the foreign exchange market. He has also worked as a consultant to the Ministry of Finance.
That apart, Patel has also held positions such as President (Business Development) at Reliance Industries Ltd; Executive Director and Member of the Management Committee at Infrastructure Development Finance Company Limited (IDFC) (1997-2006); Member of the Integrated Energy Policy Committee of the Government of India (2004-2006); and Member of the Board, Gujarat State Petroleum Corporation Limited.