New RBI governor Urjit Patel's first day in office: Here are his key challenges

Urjit Patel, the new Reserve Bank of India governor took charge on Monday, a bank holiday without any fanfare.The 52-year-old Dr. Patel’s appointment as the 24th RBI Governor was effective Sunday, though his first working day is today, September 6, due to Monday being a holiday for Ganesh Chaturthi, according to PTI.

Urjit Patel, new Reserve Bank of Governor. Reuters

Urjit Patel, new Reserve Bank of Governor. Reuters

A number of corporate leaders and bankers who have previously worked with Patel said he was expected to show “much better understanding” of the problems companies and banks are facing due to the central bank’s AQR (Asset Quality Review) directive, reported PTI earlier.

Patel has his task cut out, primarily to complete the ‘unfinished agenda’ of his predecessor, Raghuram Rajan on completing ‘deep surgery’ of banks and winning the war on inflation. However, aPTI report revealed analysts and experts see Patel continuing with former governor Raghuram Rajan's policies. "In our view, Patel is likely to maintain similar views as Governor Rajan in the inflation targeting, banking sector reforms, overall liquidity, and exchange rate policy area," Goldman Sachs said in a research note.

The recently announced inflation targeting framework sets a headline CPI inflation target of 4 percent +/- 2 per cent until first quarter of 2021. In addition, the RBI outlined in its monetary policy statements that it aims to bring headline CPI inflation down to 5 percent by March 2017.

"Given that the formalised inflation target is in line with the Urjit Patel Committee report, we think the RBI's view on inflation targeting under the new governor will be unchanged," the report said, according to PTI.

In an earlier piece in Firstpost, Dinesh Unnikrishnan had spelt out the challenges for the new RBI governor.

There are two key challenges for Patel -- continuing with the inflation battle and taking ahead the banking sector reforms, mainly the clean-up of non-performing assets (NPAs). Both have political implications and can turn out to be tough tasks for Patel as he wears the governor’s cap.

On the inflation-front, though the government has agreed to a 4 percent target, it may not have unending patience to tolerate high interest rates in the economy. If the upside risks to inflation picks up substantially in the coming time, the RBI may prefer to continue on pause mode for a longer-than-expected period which may not be necessarily acceptable to the government. And what could worsen things for RBI is that in the proposed joint monetary policy committee (MPC), the government may have a strong upper hand, curtailing RBI’s role.

With Patel’s elevation, the post of the deputy governor in charge of the monetary policy is vacant and the government can fill in someone who agrees with its views. That would mean in the 6-member panel (three each from both side), the government will have an invisible upper hand that could complicate things for Patel on the policy front.

Remember, some of the RBI governors who joined from the government (for example D Subbarao), with a perceived government’s man image, had to lock horns with the North Block later on various policy issues. Under Rajan’s shadow, Patel didn’t have much problem but he may have to travel the same road being the new face of the central bank.

On the banking sector clean-up too, things may not be easy for Patel. The large-scale digging out of NPAs (following Rajan’s March 2017 deadline to complete the task) has eroded substantial capital from public sector banks’ coffers, resulting in a much bigger burden on the government which owns 70 percent of the Indian banking system through state-run banks. The cronies and crooks that looted the Indian banks so far too have been irked by the sudden jolt. How Patel will handle this pressure and take the bank clean-up exercise to its logical end is something one should wait and watch.

Thirdly, Patel may have to face some new issues too. According to reports, the government wants to tap the central bank’s funds to recapitalise public sector banks.

The RBI has a total equity of 32 percent of its assets and the government wants to draw this fund, which is a combination of contingency funds, capital and retained earnings, to bail out the cracked balance sheets of state-run banks.

The earlier leadership of RBI, under former RBI governor Rajan, seemed to have reservations about this move since it perceived that a strong corpus of contingency funds with the central bank is crucial for the country in the long term. Even more critical, infusing these funds in sarkari banks may prove to be a dangerous idea in the long-term since the issues of these lenders are more on account of operational inefficiency and not just capital shortage. The government should instead privatise these banks and let them compete in the free market. How Patel will respond to such a situation is worth watching.

The point here is this: Patel has so far managed to be in the good books of the Modi government. But, in his new role as the RBI governor there are many big hurdles that await him in the road ahead.

(With inputs from agencies)

Updated Date: Sep 06, 2016 11:42 AM

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