Known in the RBI as a close lieutenant of Rajan to fight inflation, Patel had headed a committee that introduced landmark changes in the monetary policy formulation of the central bank that are hailed as the most significant monetary policy reforms since India opened up its economy in 1991.
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As such traders expect Patel to keep the repo rate on hold at the RBI’s next policy review on October 4 after inflation accelerated to 6.07 percent in July, above the RBI’s near-term target of 5 percent.
The 52-year-old Patel has been appointed as new RBI Governor, official sources said today. An extensive exercise was undertaken by the committee to suggest a panel of names, to the Appointment Committee of Cabinet (ACC). Besides, RBI deputy governor in-charge of the monetary policy and an office bearer of the central bank are the other two members in the committee.
He holds an M. Phil in economics from Oxford University and a PhD in economics from Yale University. Ever since Rajan, in an unprecedented letter to his colleagues in June, said he was opting out of a second term at the helm of India’s central bank, speculation has been rife over who his successor would be – particularly given the outspoken nature of the incumbent and the eyebrows he raised.
The RBI should seek price stability, for which macro-prudence and macro-stability are more important than taming the consumer price index. He had even been critical of the previous Governor D. Subbarao’s policy on interest rates that led to prices rising at double digits. This is an acknowledgement of the fact that the government has recognised the importance of “institutional RBI Governor” and Patel is a far sighted person and an economist.
The medium term objective of RBI is to attain 4 per cent retail inflation with a tolerance band of plus, minus 2 percentage points.
“His appointment would ensure a smooth transition and continuity in monetary policy, as India puts in place major structural reforms to transition to a higher growth path”.
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.
Also read: Will Raghuram Rajan’s monetary policy yield fruit in new fiscal? “The shift to inflation targeting at the beginning of past year has contributed to enhance the credibility and transparency of India’s monetary policy”, she said.
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If the government sticks to precedent and gets an economist as the new DG who is not from the RBI ranks, the task might be a little simpler for the RBI board as executive director Patra will continue to be its representative on MPC.
