BackA safe pair of hands at the central bank
Urjit Patel has a sophisticated sense of the policy challenges ahead
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The Narendra Modi government has done well to choose Urjit Patel as the new governor of the Reserve Bank of India. He has contributed to several areas of economics and policy over the past many years, but Patel is at heart a macroeconomist with a sophisticated sense of the policy challenges ahead.
Patel takes charge of Indian monetary affairs under vastly different circumstances than Raghuram Rajan did three years ago. Inflation has come down sharply, the current account deficit is being comfortably financed, policy credibility has been partially restored, and a new monetary policy framework is in place. A lot of credit for this has to be given to the trio of P. Chidambaram, Arun Jaitley and Rajan. The new governor was also an important combatant in the long battle against persistently high inflation.
But it is not going to be a cakewalk. Patel’s two biggest challenges right now will be the state of Indian public sector banks as well as establishing a good working relationship with the finance ministry. It is also worth remembering an old curse: Many governors have had to walk through fire in the early weeks of their tenure—S. Venkitaramanan during the economic crisis preceding the 1991 reforms, Bimal Jalan during the 1997 Asian financial crisis, D. Subbarao during the 2008 crisis that almost wrecked the global financial system, and Rajan during the 2013 rupee scare. Patel may have an easier beginning, even though the redemption of around $25 billion of dollar deposits due next month is an event worth watching closely.
The new governor is a naturally reticent person, especially when it comes to large groups of people. He will have to adapt to a job that is inevitably done under the glare of public attention. This is not just because of a nosy media contingent. Good communication is one of the central planks of the new global consensus on monetary policy. Patel will also have to work closely with bankers as they deal with the horrible bad loan problem. And he has to carry a large—and at times inertial—organization with him as well. Being laconic is just not an option.
Anybody seeking useful insights into how the new governor thinks would do well to read the paper on Indian inflation that he jointly wrote with Gangadhar Darbha in 2011. It was at one level an acerbic attack on what the two economists described as the confused eclecticism at the Indian central bank. They argued that while inflation had drifted up after 2006, the monetary policy response was muddled. What is equally important is that they used rigorous empirical tools to show how inflation had become a generalized problem. Their fundamental point was that inflation had become unhinged because of poor macroeconomic policy rather than exogenous shocks—higher food and fuel prices—that the Indian central bank had no control over.
This combination of intellectual clarity, plain talking and firm empirical foundations will most likely be carried over to the new job as well. Patel chaired the committee that created the new monetary policy framework that has since been backed by the Modi government. One of the common misconceptions about this new framework is that it is obsessively concerned about inflation. Actually, it is all about flexible inflation targeting—and explicitly recognizes a trade-off between inflation and growth over the business cycle, as anybody who has actually read the entire report will realize.
What quite rightly worry economists like Patel are the persistent episodes of high inflation, as the one India had between 2006 and 2014, that eventually hurt economic growth in the medium term. So, while terms such as hawk are loosely thrown around when it comes to the new governor, it is quite likely that he will be flexible in his interest rate policy, as long as inflation is close to the target that has been now enshrined in law.
Rajan has left behind a strong legacy at the Indian central bank. Patel is the right person to carry the new monetary policy arrangement forward—as well as gradually make his own mark at the apex of Indian monetary policy.
Is Urjit Patel a good pick for heading the Reserve Bank of India? Tell us at views@livemint.com
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