Goodbye, Raghuram Rajan. Good luck, Urjit Patel
A notification was issued by the government on August 6 on monetary policy. The Urjit Patel Committee, set up by Reserve Bank of India (RBI) governor Raghuram Rajan, suggested setting inflation targets and accountability on the RBI.
Under the chairmanship of Patel, the panel had proposed inflation-targeting and the setting up of a Monetary Policy Committee, which has been accepted by the government.
Finance minister Arun Jaitley on Thursday held an hour-long discussion with Prime Minister Narendra Modi over the appointment of a new RBI governor, a post that will fall vacant on September 4.
The appointment has been made based on the recommendation of the Financial Sector Regulatory Appointments Search Committee (FSRASC), headed by the cabinet secretary.
The committee undertook an extensive exercise to suggest a panel of names to the Appointments Committee of Cabinet (ACC), a statement from the ACC said. Patel has been a serving deputy governor of the central bank for more than three years.
He holds a Doctorate (Ph.D) in economics from Yale University. He is also a graduate from the University of London and Oxford University. He is known as an expert on inflation and has also been with the International Monetary Fund and the Boston Consulting Group.
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| Raghuram Rajan is demitting office next month. |
Hardcore economists are looking for his assessment of the global markets and his prognosis for the Indian economy.
The RBI should seek price stability, for which macro-prudence and macro-stability are more important than taming the consumer price index.
Nobody should be expecting any action on interest rates or liquidity by the incoming governor in his first few months of term or even perhaps a little later as it will be no longer required to do so to prove a point any more. It is no longer the onus of the RBI governor to announce policy rates unilaterally.
The government has already given legal backing to a policy framework for inflation targeting of 4 per cent with a 2 per cent point band on both sides. Given that consumer price rise is near a two-year high, any bump-up in the forecast will mean no rate cuts for the rest of the year at least.
The new governor is sure to reiterate the virtues of macro-prudential economic policies, whether monetary or fiscal.
A dovish stance should help the rupee weather global changes like China's devaluations or the fallout of Brexit as also the US Federal Reserve's possible interest rate hikes.
Back home, the Goods and Services Tax now being a reality, the impact of its rate on price inflation is the biggest challenge for the government, and must be so for the new RBI governor as well.
The important tasks ahead for the new governor are likely to be:
1) Correcting the framework for the marginal cost of lending rate, which aims at better transmission of policy rate changes to borrowers to achieve the purpose.
2) Allowing banks to net off derivatives exposure that would give them comfort on capital.
3) Spelling out the RBI's stand on liquidity.
4) Sticky loans, which are unsavoury but overlooked.
The other important area of focus by the new governor would be Peer-to-Peer (P2P) lending, a booming online service where individuals and businesses borrow directly from lenders or investors with the help of the P2P platform, which needs to be regulated henceforth.
The good news for Patel is that three major growth drivers are at work profitably - well-constructed fiscal and monetary policies, global fortune of declining oil prices and India's growth surpassing major economic powers like China.
Above all, India is considered a forerunner in the World Bank's chart of major emerging economies, according to a recent world bank communiqué.
Hope the new governor maintains a fair balance between North Block and Mint Street and tries to leave his stamp on the history of RBI, the way the previous governors did.
C Rangarajan opened up the markets, YV Reddy strengthened forex reserves and Rajan tied the government in a legal knot with the RBI and historically instituted the Monetary Policy Committee.