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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