BackUrjit Patel: The hawk without a halo
RBI governor-designate Urjit Patel has the reputation of being an inflation as well as fiscal hawk, but going ahead, his communication skills will be key
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The government’s decision to appoint Urjit Patel as the next governor of the Reserve Bank of India (RBI) is meant to reassure markets and investors—foreign investors in particular—that the sensible policies initiated by Raghuram Rajan will continue.
It seeks to repair the damage caused to the government’s image by Rajan’s exit. The move is intended to signal that the government has no problem with either Rajan’s policies or with the independence of the central bank. After all, the least one can expect is that Patel will implement the road map of the monetary policy committee (MPC) that he himself chaired. Also, he has the reputation of being an inflation as well as fiscal hawk.
Does it mean that the RBI will continue to go down the road to 4% inflation then? Patel has very strong opinions about inflation, as seen from a 2012 paper called Dynamics of Inflation Herding: Decoding India’s Inflation Process that he wrote for the Brookings Institution along with economist Gangadhar Darbha. The paper has some very scathing remarks about the attitude of the then government and the RBI top brass to inflation.
Here’s a little flavour of what it contains: “A spate of recent statements seems to suggest that the medium-term objective of around three percent inflation articulated by inter alia the Reserve Bank of India (RBI) is being given a quiet burial; A senior (and serious) official earlier this year described six percent annual inflation as ‘comfortable’, and ‘quiet (sic) acceptable’—comfortable and acceptable to whom? Is the suspension of long-standing sound, conservative, inflationary targets temporary, or, is this the new ‘normal?"
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And finally, there’s a direct attack on then RBI governor D. Subbarao: “This is an astonishing series of nihilistic statements—unassisted by evidence or even a hint of scientific thoroughness—from the central bank head pleading either hopelessness on account of India being a large and diverse Federal entity, or, a form of muddled eclecticism."
A man who wrote that is unlikely to be comfortable with the current inflation rate of 6%, nor would he be happy with giving the 4% inflation target a quiet burial, nor will he be a fan of the “muddled eclecticism" that believes there’s a trade-off between inflation and growth in the long term.
Does that mean the government is fine if interest rates don’t come down further? Well, which government wouldn’t want lower interest rates, but it realizes that, in a world of volatile capital flows, the key lies in policy credibility and retaining investor confidence. That it doesn’t want to give up the hard-won gains on that front is seen both from the decision to appoint Patel as the RBI governor and in its earlier choice of sticking to the fiscal deficit policy target this fiscal.
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Of course, it’s also true that the RBI governor’s role in setting interest rates has been whittled down with the introduction of the MPC. It is this committee that will take the decisions in future.
What’s more, the government disagreed with the recommendation of the Urjit Patel committee to have three members from the RBI and two government appointees in the MPC. Instead, they insisted on three government nominees and three RBI members, with the governor having the casting vote in the event of a tie.
And, as this column has pointed out earlier, there’s plenty of discretion within the inflation range, with the government saying the 4% target could be achieved over the “medium term".
But perhaps the biggest difference between Patel and Rajan lies in their style of functioning. As a despairing colleague searching for clues about Patel’s views bitterly complained, Patel has made only two speeches during his stint as RBI deputy governor in the past three-and-a-half years. In comparison, Rajan has let loose a torrent of words and views on us.
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Indeed, Patel’s low-key image, the opposite of Rajan’s rock-star persona, may have been a key factor in his appointment.
A hint of what Patel feels should be the RBI’s focus in future is contained in a December 2015 paper he wrote with economist Amartya Lahiri on Challenges of Effective Monetary Policy in Emerging Economies. He says the task ahead of central banks is to “re-balance the reform agenda from high profile subjects such as legislative amendments, like a monetary policy framework and associated institutional changes, to addressing policy-induced distortions that undermine monetary policy efficacy and transmission".
The time has come, he seems to be saying, to focus on the nuts and bolts, eschewing grand policy statements. That technocratic focus will be to the government’s liking.
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Some people have said that as RBI governor, Patel would need to communicate more. Communicating intent has been honed to a fine art by today’s central bankers, and Rajan was a master at it. In contrast, consider this little gem from a June 2015 post-credit policy meeting with the media.
To a reporter’s query on whether the fall in the rupee would weigh on the RBI’s future actions, Patel responded: “What is internalized in terms of policy action emanating from external developments is looking only at the headline inflation number and therefore it is one of many factors that would go into this decision and we would not be focusing on the external value or the volatility in the environment directly, but only indirectly through its feedback into the headline inflation rate."
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If Patel does communicate more, could he make it a bit less mystifying please?
Manas Chakravarty looks at trends and issues in the financial markets.
Comments are welcome at capitalaccount@livemint.com
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