Urjit Patel, Rajan’s lieutenant at the central bank who has now been named his successor, knows well that the banks’ reluctance is blunting transmission of monetary policy into the broader economy, even as the window of opportunity for even greater easing may be closing.
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Patel, 52, a Deputy Governor since January 2013, will take over as the 24th chief of India’s central bank on September 4. Mr Patel is close to Mr Rajan who appointed him on various committees that prepared reports on the transformation of the RBI.
“It’s a continuation of Mr. Rajan’s regime”, said Madhavi Arora, economist at Kotak Mahindra Bank Ltd.
“Markets were expecting a dovish or neutral candidate to take over as RBI Governor after Rajan”.
Investors in Indian markets have a recent rally in bonds and stocks to thank for any nervousness Urjit Patel’s appointment as central bank boss is causing. Apart from the global concerns, markets also witnessed some disappointing developments on the domestic front which did not augur well with investor’s sentiments such as Indian rupee, which weakened for the second consecutive session against the U.S. dollar.
The third challenge will be to oversee a new monetary policy committee.
The foot-dragging tactics of the Indian banks have clearly frustrated Rajan, who has unveiled a slew of measures, including injecting more cash into the banking system and forcing banks to more quickly adapt to monetary policy changes when setting their lending rates. Also, he is in charge of the monetary policy department and advocating the more relevant consumer price index (CPI) and not the wholesale price index (WPI) as the inflation targetting benchmark. Before adopting Mr. Patel’s recommendations, the RBI used many different indicators-including growth, employment, inflation and the exchange rate-which critics of that approach said had added to investors’ uncertainty.
Analysts at Nomura said the Centre’s decision to appoint Patel as Governor signals its preference for policy continuity and to low inflation, while also looking to protect the RBI’s independence. Secondly, how to solve banks’ problems and stimulate growth as it has stalled.
Many economists lamented the departure of Mr. Rajan, who famously predicted the 2008 global financial crisis and whom Indian newspapers have jokingly likened to James Bond. Meanwhile, good buying was observed in selected metal stocks as India has slapped anti-dumping duty on certain cold-rolled flat steel products from four nations including China and South Korea to guard domestic industry from cheap imports.
The wish list that “Dr Patel”, as he is commonly referred to as, faces is long and could be hard to fulfil on many fronts – lower the rates, go easy on banks and borrowers, be liberal with grant of banking licences, safeguard foreign reserves and rather beef it up. Support remains at 66.60, reflecting what is perceived to be the floor set out by the Reserve Bank of India.
Rajan, by contrast, faced a backlash from hard-right elements in Prime Minister Narendra Modi Bharatiya Janata Party (BJP) for sometimes peppering his public statements with social critiques. Mr. Patel is less likely to get inflation-fighting assistance than did his predecessor from falling commodity prices.
He also will be restricted by a recent overhaul in the bank’s policy-making structure. The new structure is a radical departure from the past, when the onus of rate decisions rested with the governor alone. India will have to pay back most of the money by November.
Another challenge he faces is the mountain of bad debt at the country’s government-owned banks.
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“Banks still have to remain profitable”. This restriction has been keeping the benefits of multiple rate cuts from trickling down into the economy and could hamper expansion prospects.
