New Delhi: Has the Reserve Bank of India (RBI) under its new governor, Urjit Patel, surrendered its hard-fought autonomy? Many experts feel so, particularly after the manner in which Prime Minister Narendra Modi‘s government has handled the demonetisation drive.
Former Prime Minister Manmohan Singh, also a former governor of the RBI and a finance minister, lamented in Parliament recently that constant modifications in the country’s banking system following demonetisation was not good for the country or the RBI.
“That reflects very poorly on the Prime Minister’s office, on the Finance Minister’s office and on the Reserve Bank of India,” he told the Rajya Sabha last month. “I’m very sorry the Reserve Bank of India has been exposed to this sort of criticism, which I think is fully justified.”
What is unclear in this whole exercise is how much say the country’s central bank — the apex monetary policy authority, established on April 1, 1935, following the enactment of the Reserve Bank of India Act, 1934 — had in the policy decision.
“The government said the RBI has recommended the demonetisation. I do not know whether the government has forced the RBI to ask or the RBI took the call on its own,” RBI’s former Deputy Governor K.C. Chakrabarty told IANS over phone from London.
“I’ll not be able to say (on RBI’s views being valued) unless the minutes of the board meet is shown,” he added, alluding to some interference by the government, since RBI’s position has always been against demonetisation.
“That was the consistent view of the Reserve Bank in the past,” Chakrabarty said.
In a reply to Bloomberg, on a right-to-information query, the apex bank said that the decision to withdraw the legal tender character of the Rs 1,000 and Rs 500 notes was taken by the RBI board at 5.30 p.m. on November 8 — less than three hours before Modi announced it to the country.
Overnight, Rs 15.44 lakh crore or 86 percent of the currency in circulation was declared illegal. Norms were announced by the Prime Minister on how people could deal with such currency in their possession — which were subsequently changed on an almost daily basis.
Regarding autonomy, Chakrabarty said: “You must understand the autonomy that the RBI was getting from the government was because the government was to give the autonomy to the institution. If the government does not want to give anybody autonomy, the RBI cannot do anything.”
West Bengal Finance Minister Amit Mitra was more direct.
“Most eminent people in India have been RBI governors, including the present governor (Urjit Patel). He is a good economist. Now the same autonomous institution has lost its teeth. It has been issuing notices and withdrawing notices as per government’s instructions,” Mitra told IANS.
“What is very dangerous regarding demonetisation has gone unnoticed. The deeper issue is that fundamental institutions of India of historic nature are being undermined and emasculated. Therefore, the faith in them by the people is under question today,” he added.
The money that was declared illegal is yet to be replaced in any substantial measure — at last count, the RBI said Rs 5.93 lakh crore of new Rs 2,000 and Rs 500 have been issued. Since November 10, most ATMs across the country have remained shut and those which do open their shutters run dry of cash very quickly. Bank cash counters have the same woes, despite restrictions on the amount that individuals or companies can withdraw.
Many bankers too seemed to have lost faith on the towering apex institution.
“Yes, the RBI seems to have lost its autonomy in the issue of demonetisation which has been totally mismanaged,” a chief executive of a bank told IANS, declining to be named.
“The RBI should have advised the government on the ground reality about withdrawing 86 percent of the currency notes in circulation and the logistical issues,” he added, suggesting that the central bank should have stuck to its ground.
In fact, Duvvuri Subbarao, former RBI Governor and Finance Secretary, has been rather candid about his relationship with the government and the finance minister (P. Chidambaram at that time) when he was at the helm at Mint Street, the headquarters of the RBI in Mumbai.
“Both have the same objective of growth, but RBI looks at long-term growth and the government looks at short term growth that results in different priorities for both. There is no way out,” Subbarao told IANS.
“It all depends on the chemistry between the finance minister and the governor,” he said.
But experts hope the question of autonomy could come under less pressure, now that a Monetary Policy Committee (MPC) has been named and has started functioning — with three representatives each from the government and the RBI, and the veto power with the Governor.
“I support formation of MPC, though it will curtail the decision-making powers of the RBI Governor,” said Subbarao. “The Governor will discuss and listen to all stakeholders in the committee, so he will not be solely responsible for the decision on interest rates.”
But some domain experts like M.R. Sivaraman, former Union Revenue Secretary and former Executive Director at the International Monetary Fund, don’t think demonetisation exercise, at least, reflects loss of the RBI’s autonomy. On the contrary, they feel it is RBI that should have handled the situation better.
“Demonetisation will curb black money, eliminate fake currency and bring out unaccounted cash stashed away into the banking system,” said former Infosys board member T.V. Mohandas Pai, dismissing suggestions about loss of independence.
First Published On : Dec 29, 2016 19:26 IST
For the interest rate setting Monetary Policy Committee (MPC), the government on Thursday announced the names of three eminent experts, who will be part of the six-member MPC. The Appointments Committee of the Cabinet (ACC) named Indian Statistical Institute professor Chetan Ghate, Delhi School of Economics director Pami Dua and Ravindra H Dholakia of IIM-Ahmedabad as members of MPC.
According to reports, the Monetary Policy Committee will take decision on setting interest rates beginning with the next credit policy meet scheduled on 4 October. So, will these three government-appointed members and the RBI’s other three members set the ball rolling and go for another round of rate cut, especially in the wake of good monsoon and moderating inflation levels? And, will the home buyers get a rate-cut boost and would the equated monthly installments of the existing loans fall further?
While we will have to wait for a couple of weeks to know the decision, here’s a look at the short profiles of these three government appointed MPC members.
Chetan Ghate: He is an associate professor, Planning Unit, Indian Statistical Institute. He has a PhD from Claremont Graduate School, California. His areas of interest are macroeconomic theory and policy, growth and development, political economy, open economy macroeconomics. According to the Institute website, the focus of his research is economic growth, fluctuations, economic development, and monetary and fiscal policy in developing and emerging market economies.
“I have recently been working on unbalanced growth in India, fiscal policy in small open economies, monetary policy and terms of trade shocks, and endogenous growth models with endogenous investment specific technological change,” he says on the website. At the institute, he teaches at the graduate level courses in macroeconomics and monetary theory and policy.
Pami Dua: She is currently the head of the department at the Delhi School of Economics. After completing her graduation in economics in India, she did her masters and PhD in economics from the London School of Economics. Dua is also an expert in forecasting, economic forecasting, time series analysis, econometrics and applied macroeconomics.
Ravindra H Dholakia: He has been a professor of economics ares at IIM-Ahmedabad since 1985. According to the website, he has about 38 years of experience in teaching. He was a regular visiting faculty to teach at the European Management Institute (ESCP-EAP), Paris from 2002 to 2005.
He has collaborated on a series of research projects with the Earth Institute of Columbia University from 2004-05 to 2012-13. He has practical experience in high powered policy making and evaluation bodies in both state and central governments in India. Dholakia was also a Member of the High Level Committees on Leveraging Postal Network in India (Aug-Nov 2014), HR Issues in the Merger of Air India and Indian Airlines (May 2011- Jan 2012), a Member of the Sixth Central Pay Commission of the Government of India (2006 – 08); a Member of the Expert Committee on Restructuring of the State Public Sector Units (2004-08).
He has carried out numerous consulting assignments in the private and public sector companies in India and has done work for the international organizations like WHO, UNICEF, World Bank, UNDP, Hewlett Foundation, United Nations, UN–Mongolia, etc. He has also developed 15 international cases on economic planning and policy reforms based on experiences of countries in Asia, Africa, the Caribbean Islands, and North America.
This IIM-Ahmedabad professor has also served as an independent director on the Boards of Gujarat State Financial Services, National Commodity and Derivatives Exchange, Power Finance Corporation, State Trading Corporation, Adani Ports and Special Economic Zone, Adani Enterprises, Union Bank of India, Air India, Gujarat State Petroleum Corporation, etc. He was also President of the Indian Health Economics and Policy Association during 2012-13.
Ever since Raghuram Rajan announced that he would be going back to academics when his tenure ends, there has been a lot of speculation on the next governor. The names that were discussed ranged from bureaucrats, members of institutions and some leading economists. It did seem to also be surprising that the decision has been taken just around two weeks before the present governor completes his term. The name of Urjit Patel was certainly high on the list and in a way the selection was not out of the blue.
The first thought that comes to mind is that his selection indicates continuity and this is good for the system because it sets to rest speculation on what the RBI thinks about various issues and how it will react to different situations. He is also presently in charge of monetary policy and hence is ideally suited to work with the ministry of finance, which is the other important player on the monetary stage. The market should feel reassured though not ecstatic and it will probably be business as usual on Monday when trading starts in all the markets.
Patel, it must be remembered, had steered the committee on monetary policy and the recommendations thrown up were accepted by the RBI and subsequently the ministry of finance. The concept of monetary policy committee germinated from his report and hence in a way he may be called the father of this idea. With this system set to be institutionalised, there would be less controversy on how it is conducted and to this extent the road will be predictable.
There would be three areas of focus as he takes over. The immediate challenge so as to call it is to address the issue of redemption of FCNR deposits of around $25 bn. Ironically when Raghuram Rajan took over he had addressed the issue of getting in this money to stabilise the currency. Now the new governor has to work to ensure the repayment, while keeping the Rupee stable. This is what can be called the very short term objective.
Second, in the short to medium term the conduct of monetary policy through the MPC has to be worked out. While the members will be announced, the questions that are raised are in the areas of which entity would be presenting the policy. Would the committee members also be present and whether if there is a difference of opinion within the committee, what would the tone be. Therefore getting this committee in place and then operationalising the same will be the job of the new governor.
Third, the medium to long-term radar would be on the banking sector especially the public sectors banks. The present situation though looking better on the issue of quality of assets is still hazy in terms of timelines. Banks need to clean up their books as soon as possible and only then can they begin on a clean slate. Quite fortuitously this period coincides with one where economic conditions are not strong enough to warrant demand for funds. Once the cycle turns around, banks should be prepared to lend.
This leads to the associated issue of bank capitalisation. Getting the government to lower its stake to 51 percent has been the stated objective. But we need to move closer to the implementation, which can happen only when the books are in good condition or else the valuation will be low. Hence, the governor will have to look at ways of expediting this process to ensure that in the next couple of years these banks are able to stand on their own feet.
The rest of the work to be done will be fairly routine as has been the case, though the market will always try and guess how his mind works on the ideal inflation rate and hence preference for the interest rate, his view on the exchange rate and his reaction to it and the speed of financial sector reforms.
The easy part of the job is that several ideas which germinated in the era of Subbarao, have gotten transformed into work in progress under Rajan, and hence seeing through the successful implementation should be fairly seamless for the new governor. Also given that he has been in the system and most likely contributed to them, would make it easier to see them through. The economy too appears to be poised for upward movement only which makes it easier to go in for consolidation of all the banking policies.
The end of this uncertainty is good and the fact that he has been deputy governor is positive for the markets. However, it would now be time for speculation on who would be the next deputy governor in place of Urjit Patel. As this position is reserved for an economist normally, the media will be abuzz with several names. Will it be one with a foreign background? Or would it be one from the ministry? Or will it be an independent economist? Admittedly it can be anyone from these categories. There would, also have to be some reworking of the portfolios as the monetary policy one which has traditionally been the forte of the economist governor is being institutionalized. But the media will be watching closely for sure as will the markets.
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<!– /11440465/Dna_Article_Middle_300x250_BTF –>Ending two months of intense speculation, the Union government on Saturday appointed Urijit Patel as the 24th governor of Reserve Bank of India (RBI) for a period of three years. Patel, seen as a close aide of outgoing governor Raghuram Rajan and deputy governor in charge of monetary policy, will assume office on September 5, a day after Rajan’s term ends. He will be one among the few governors – after Manmohan Singh and Raghuram Rajan – to be appointed to the top post from outside the IAS circle.How did the scales tilt in favour of Urijit Patel when there were equally qualified experts like Arvind Subramanian, chief economic advisor, or Shantikanta Das, economic affairs secretary? Was he handpicked by Prime Minister Narendra Modi himself? Of course, opinion among economists, bankers and other stake-holders are divided on these counts, though most experts opine that probably the government wanted a continuity in the monetary policies and didn’t want any disruptions by bringing in a new candidate.The challenges before the new governor, however, would be to continuing to keep his grip on inflation, helping banks in strengthening their balance sheets and bringing in regulations that will ensure the stability of the financial system. Many believe that 53-year-old Patel’s prime focus will be to keep the galloping inflation under control though a granular surveillance on the interest rates. Urijit Patel, deputy governor since January 2013, has been a key figure in framing the monetary-policy framework that set food price inflation as the target for tackling inflation rather than focus on whole sale price inflation, which gave more weightage to industrial production. Arundhati Bhattacharya, chairman, SBI said, “Dr. Patel has been at the helm of instiutionalising the inflation targeting regime in the monetary policy framework. His appointment signals continuity of policy intent both on the part of RBI and the government.”The six-member rate setting committee will be set up shortly after the government appoints its three members. In the new role, Urijit Patel will have the flexibility to implement the policies on inflation and interest rates that he helped to formulate. And he takes over at a time when retail inflation and the whole sale inflation have both overshot expectations at 6.07% and 3.55% respectively.Ashutosh Khajuria, executive director, Federal bank said, “Patel is seen as Rajan’s lieutenant and the government wants to see continuity. It was his paper on monetary policy recommendations that set CPI as inflation target and the government has notified a 4% medium-term inflation target (with tolerance levels plus or minus 2%) has now become a legislation endorsed by the parliament. So his credentials as a economic policy expert is impeccable.” Chanda Kochhar, MD and CEO, ICICI Bank said, “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.”Patel, who completed his graduation programme from the London school of economics, has an MPhil from Oxford University and a doctorate in Economics from Yale university (1990). His previous assignment included terms with the International Monetary Fund (IMF), the Brookings Institution at Washington and the Massachusetts-based Boston Consulting Group and Reliance Industries and non-executive director of the multi-commodity Exchange of India Ltd.Patel will contribute to India’s growth story: JaitleyFinance minister Arun Jaitley exuded confidence that Urjit Patel will contribute to India’s economic development as the next Reserve Bank governor. “I’m sure he will successfully lead the Reserve Bank & contribute to India’s economic development,” Jaitley tweeted congratulating Patel.It’ll be idiotic to attack Patel: Subramanian SwamyUrjit Patel’s appointment appeared to have support of BJP MP Subramanian Swamy who had launched a series of attacks against the outgoing governor Raghuram Rajan. In a string of retweets and replies to his Twitter followers, Swamy said it will be utter “idiotic” to think he will attack Patel because he was born in Kenya.When one of his followers criticised Patel for being a Kenyan national, Swamy replied: “He is not a Kenyan citizen, but was. R3 was born Indian and chose to continue his US green card even though in India from 2007.” R3 is the acronym he uses for referring to Raghuram Rajan.
Tokyo: Amid concerns of a slowing global growth, India is a beacon of hope and has the potential to drive the world economy for the next 10 years, former Singapore prime minister Goh Chok Tong said on Monday.
“India is a hope for us. India is at a stage China was 10 years ago to amend slack in the economy,” he said speaking at the Future of Asia Conference organised by Nikkei in Tokyo, Japan.
Finance Minister Arun Jaitley, who arrived here yesterday on a 6-day tour to help mobilise investment, attended the conference, but did not make any statement. He is scheduled to speak at the conference on Tuesday.
The former Singapore prime minister felt that India should take advantage as China slows.
“One should pass the message to Prime Minister (Narendra) Modi (that) India is growing… now and it is engine of the world for the next 10 years as China is slowing,” he said.
He said the world economy can now depend on India for the growth push and it is not just China the world needs to depend on. “(The world) not just depends on China for pushing growth, India can be a very big partner.
“The International Monetary Fund (IMF) last month cut its 2016 global growth forecast for the fourth time in the past year to 3.2 per cent, citing China slowdown, persistently low oil prices and chronic weakness in advanced economies.
This was down from 3.4 per cent projected in January.
In contrast, for India, it retained its 7.5 per cent GDP expansion forecast for 2016 and 2017, up from 7.3 per cent in 2015.
“With the revival of sentiment and pick-up in industrial activity, a recovery of private investment is expected to further strengthen growth,” it had said.
“In India, growth is projected to notch up to 7.5 per cent in 2016-17, as forecast in October. Growth will continue to be driven by private consumption, which has benefited from lower energy prices and higher real incomes.”
It, however, wanted the government to cut down subsidies, initiate labour reforms and dismantle infrastructure bottlenecks to sustain strong growth.
IMF had said a prolonged period of slow growth has left the global economy more exposed to negative shocks and raised the risk that the world will slide into stagnation.
It, however, upgraded its China growth forecast by 0.2 percentage point for this year and the next to 6.5 per cent and 6.2 per cent, respectively.
China clocked 6.9 per cent growth in 2015 when India had recorded 7.3 per cent expansion.
Washington: There could be “stray” incidents of people on either side of the political spectrum making irresponsible statements but this could not be generalised as prevalence of a climate of intolerance in the country, Union Minister Arun Jaitley has said.
The Finance Minister is currently on a week-long tour of the US primarily to attend the annual Spring meeting of the International Monetary Fund and the World Bank.
Dubbing such incidents as “terrible”, the senior BJP leader, however, said that they are “rare” in a large country like India.
“There could be stray incidents of irresponsible statements by individuals on either side of the political spectrum, that does not mean that zamin per koi iss tarah ki activity hai (intolerance exists),” Jaitley said during a media roundtable with Indian reporters here.
“These are bad incidents. These are terrible incidents, but these are extremely rare in a large country. Historically stray incidents have taken place,” he said when his attention was drawn towards some of the specific such incidents.
Responding to a question on alleged prevalence of intolerance in the country, Jaitley described this as a creation of media.
“On the ground, my own understanding of the subject is, are there a lot of things happening that show this (intolerance)? The answer is no.
“There could be in a large country like India some incident or the other, which takes place one time, which could be considered highly improper and condemnable,” he said.
When asked if there is any introspection within the party, he said: “Actually neither in the party agenda nor on the ground there is any such activity wherein in a large country like India it (incidents of intolerance) is happening state after state.”
“A news channel can show same four people giving irresponsible statements and build a story around it. That seems to be more of what is happening.
“What gets projected is in a large body of politics there would always be three or four people who would react aggressively and disproportionally to events,” he observed.
“So loose comments, loose statements, improper statements, when the television camera confronts you, you say what you should not say, aise char, panch, chhe log hai (there are four, five, six such people), usko aap environment of intolerance kah do? (and you describe them as an environment of intolerance)?” the minister asked.
He also had the annual India US Economic and Financial Dialogue on Thursday and bilateral meetings with his counterparts from China, Luxembourg and Bangladesh.
Over the weekend, he would travel to New York to interact with the business community there and address a meeting at the United Nations.
Washington: Driven by private consumption and increased industrial activity, India’s growth is projected to
notch up to 7.5 per cent in 2016–17, overtaking China’s GDP by more than 1 per cent, the IMF said today.
Retaining its last October forecast, the International Monetary Fund in its latest World Economic Outlook report said, “With the revival of sentiment and pickup in industrial activity, a recovery of private investment is expected to further strengthen growth.”
“In India, growth is projected to notch up to 7.5 percent in 2016–17, as forecast in October. Growth will continue to be
driven by private consumption, which has benefited from lower energy prices and higher real incomes,” it said.
The World Economic Outlook report noted that in India, monetary conditions remain consistent with achieving the inflation target of 5 per cent in the first half of 2017, although an unfavourable monsoon and an expected public sector wage increase pose upside risks.
In India, lower commodity prices, a range of supply side measures, and a relatively tight monetary stance have resulted in a faster-than-expected fall in inflation, making room for nominal interest rate cuts, but upside risks to inflation could necessitate a tightening of monetary policy, it said.
“Fiscal consolidation should continue, underpinned by revenue reforms and further reductions in subsidies. Sustaining strong growth over the medium term will require labour market reforms and dismantling of infrastructure bottlenecks, especially in the power sector,” IMF said.
In 2015, India’s growth was 7.3 per cent, which would increase to 7.5 per cent in the next two years of 2016 and 2017, the IMF said.
At the same time, the IMF report has projected a decline in China’s growth rate from 6.9 per cent in 2015 to 6.5 per cent in 2016 and 6.2 per cent in 2017.
“China, now the world’s largest economy on a purchasing-power-parity basis, is navigating a momentous but complex transition toward more sustainable growth based on consumption and services,” it said.
“Ultimately, that process will benefit both China and the world. Given China’s important role in global trade, however, bumps along the way could have substantial spillover effects, especially on emerging market and developing economies,” the report said.
According to the report, the rebalancing process in China may be less smooth than assumed in the baseline scenario.
“A sharper slowdown in China than currently projected could have strong international spillovers through trade, commodity prices, and confidence, and lead to a more generalised slowdown in the global economy, especially if it further curtailed expectations of future income,” it said.
New Delhi: Amid rising concern over default by large borrowers like liquor baron Vijay Mallya, Prime Minister Narendra Modi on Monday stressed that the government as well as RBI is taking “tough action” to recover loans from corporate defaulters.
“The only segment showing an increase in (corporate rating) downgrades is highly leveraged large firms. The government and Reserve Bank have taken tough action to recover dues from large corporate defaulters. Perhaps the noise from this segment has influenced media perceptions,” he said at Bloomberg India Economic Forum in Delhi.
Gross Non Performing Assets (NPAs) of public sector banks (PSBs) increased from Rs 2,67,065 lakh crore in March last year to Rs 3,61,731 lakh crore in December.
There was an increase of Rs 94,666 crore over the nine months of the current fiscal.
The gross NPAs of PSBs increased from 5.43 per cent as on March last year to 7.30 per cent in December.
Even Finance Minister Arun Jaitley in a stern warning to wilful defaulters had on Sunday said they should settle dues honourably with the banks or else be ready to face “coercive action” by lenders and investigative agencies.
“I don’t want to make any comments on individual cases but I think it’s a responsibility of large groups like his (Vijay Mallya‘s) to honourably settle their dues with the banks,” he said.
Prime Minister said there has been a smart pickup in credit growth after September.
“Credit off-take between February 2015 and February 2016 increased by 11.5 per cent. The overall fund flow to corporate sector through equity and borrowings of various kinds, domestic and foreign, has increased in first three quarters of 2015-16 by over 30 per cent,” he said.
The government, Modi said is also trying to strengthen the monetary policy mechanism.
“Last year, we entered into a Monetary Framework Agreement with Reserve Bank of India. This year we have introduced in the Finance Bill amendments to Reserve Bank of India Act,” he said.
Under these amendments, RBI will have an inflation target and will set monetary policy through a Monetary Policy
Committee, he said.
“The committee will have no members from the Government. Through this reform, monetary policy will acquire an inflation focus and a level of institutional autonomy unprecedented in major emerging markets, and greater than several developed countries,” he said.
With regard to Pradhan Mantri Mudra Yojana, Modi said over 31 million loans have been sanctioned to entrepreneurs for a total value of nearly 19 billion dollars this year.
“You will be pleased to know that 77 per cent of these entrepreneurs are women and 22 per cent of them are from the
Scheduled Castes and Scheduled Tribes,” he said.
“Even if we assume conservatively that on average, each enterprise creates just one sustainable job, this initiative itself amounts to 31 million in new employment,” he said.
The Stand Up India scheme will also provide 250,000 entrepreneurship loans to women and Scheduled Castes and
Scheduled Tribes, he said.