RBI’s New Boss & the Challenges Ahead

Ending months of speculation, the government has announced appointment of Urjit Patel as the Reserve Bank of India’s (RBI) 24th governor, filling the shoes of Raghuram Rajan whose three-year tenure ends on September 4, 2016.

By picking Patel as the new boss of RBI, the centre has signaled continuation of prudent monetary policy, which will act as a positive trigger for the investors, bolstering the outlook of Asia’s third biggest economy.

Unlike Rajan, who took over mid-crisis, the incoming governor will inherit an economy in much better shape, with GDP growing at 7.9 per cent, a stable currency and record foreign-exchange reserves. However, there are some immediate challenges that Patel will have to face as the new RBI governor.

First and foremost, after assuming office, the primary challenge in front of the new RBI chief will be to rein in inflation as it has started inching up, led by the food prices. The global commodity prices, particularly the oil, too have started surging. Annual consumer price increases have also topped 6 per cent, breaching the government’s target.

Besides controlling inflation, Patel will face another important task of carrying forward the clean-up exercise at the banks, particularly those in the public sector. Besides, he may see a new breed of players coming up in the banking sector.

Another big challenge for Patel will be to appoint a member on the Monetary Policy Committee (MPC) which will decide the interest rate and focus on maintaining the inflation at 4 per cent with a plus/minus margin of 2 per cent. Currently, the governor alone sets interest rates but now a new six-member panel will take over before October. Three members from the RBI including the governor and three external members appointed by the government will decide on the interest rates.

Urjit Patel would also be looking closely at the impending liquidity crisis in the market. Earlier, RBI had raised about USD 35 billion through FCNR (B) deposits in September-November 2013 and most of them are getting due this year. Consequently, a dollar outflow of approximately 20 billion is anticipated!  Thus, Patel is expected to tread the middle path and keep the domestic exchange rate stable.

Urjit Patel’s appointment as the successor for Rajan has been widely hailed by both industry and markets alike. Patel is known to be very close to Rajan, a fact that adds to the belief that the new governor will follow in the footsteps of his predecessor.

Patel is someone who is well versed with the changing dynamics of the Indian economy since early 1990s. Even during his tenure under Raghuram Rajan, the RBI governor-designate had helped India to shift to an inflation targeting regime for setting interest rates. Economist expects him to be a successful and effective Central Bank’s governor who could carry forward the good work done by Rajan and further liberalise the India’s financial system.