Catch 22: Inflation Targeting or Interest Rate Cut

THE NEW GOVERNOR OF RBI- DR. URJIT PATEL As evident in the news buzz, there has been a lot of ambiguity regarding the successor of Raghuram Rajan, the 23rd governor of RBI. State Bank of India chairperson Arundhati Bhattacharya and Urjit Patel, deputy governor, RBI are among a few contenders for the post of governor at the Reserve Bank of India. After a deep analysis and discussion, Dr. Urjit R Patel has been appointed as the 24th RBI Governor for three years with effect from September 04, 2016. About Dr. Urjit Patel • Urjit R. Patel was born on October 28, 1963. • He is an Indian economist, banker and a consultant. • As the deputy governor of RBI, he played an important role in monetary policy, statistics and information management, economic policy research, and Right to Information. Education of Dr. Urjit Patel • Patel earned his Bachelor’s degree in Economics from the London School of Economics, M. Phil. degree from the Oxford University in 1986. • He is a doctorate in Economics from the Yale University. Career progression of Dr. Urjit Patel • Dr. Urjit Patel joined the International Monetary Fund (IMF) in 1990 and worked till 1995. Thereafter, he was posted on deputation to the Reserve Bank of India. • He has been a non-resident Senior Fellow of The Brookings Institution. • In 1998, Patel was appointed as the consultant to the Government of India in the Ministry of Finance, Department of Economic Affairs. • From 2000 to 2004, Dr. Patel worked with the central and state government including Competition Commission, direct taxes, market studies, anti-trust laws, Prime Minister’s Task Force on Infrastructure and sectors like telecom, aviation, power and pensions. • He also worked with many renowned private sector organizations, namely, Reliance Industries, Board Member of the Gujarat State Petroleum Corp. and Infrastructure Development Finance Company. • In 2013, Urjit Patel was appointed as the Deputy Governor of RBI. Why Dr. Patel as the new RBI governor? Urjit Patel is an expert in macro-economics and has both domestic and international experience. Moreover, he has also worked in the IDFC for a couple of years. Dr. Urjit Patel is the author of the report on which the present monetary policy framework is based. Dr. Patel is open to new economic ideas pertaining to the global financial crisis. So, there should be a person to ensure such ideology and understand the current challenges. Major challenges before Dr. Patel as the RBI governor • Introduction of Monetary Policy Committee • Tackling Rising Inflation • Bad loan mess • FCNR deposit Redemptions • Managing Political and Industry Expectations

The buzz in the corporate world and amongst policy wonks is that Raghuram Rajan opted for a graceful exit. Highly probable reasons for Raghuram Rajan’s exit are the Government didn’t see eye to eye with him on monetary policy issues and an extension was unlikely. His statements on India being an ‘one-eyed king’ despite it being the fastest growing economy in the world and the need to be circumspect when asked about the Indian economy caused much heartburn in the Government circles and ministers. This issue came into limelight when the Government was forced to give its opinion on what was otherwise a non-issue or a matter that could have been easily kept off the media glare. We will give you an insight into the story.

A closer look at the dilemma

As Dr. Urjit Patel steps into Mr. Rajan’s shoes, he would be closely watched and evaluated for his take on matters pertaining to inflation targeting and interest rate cut. Furthermore, inflation data continues to spring a surprise with an above 6 percent number despite monetary policy initiatives focused on inflation targeting. Dr. Patel will have to take a call on whether  4 to 6 percentage band is still the sacred target to be maintained or monetary policy easing is required to give a fillip to the economy. In his 3-year tenure that is soon coming to an end on September 04, Mr. Raghuram Rajan reduced CRR and SLR rates but an interest rate cut remained a more critical entity in the press rather than becoming a reality. Dr. Urjit Patel will have to decide on policy continuity for results that had been achieved in the past but require a quick-fix that would stop the CPI number going further beyond the target band. This issue formed the outer bound for inflation for much of Mr. Raghuram Rajan’s tenure or an interest rate cut that would spur the economy in times where uncertainty plagues economies. Dr. Patel being an RBI insider, having been a Deputy Governor at the RBI makes him an ideal choice. He is abreast with the considerations that led to the policy decisions taken during Mr. Rajan’s tenure. Now, that he wears the Governor’s hat, it remains to be seen whether he opts for continuity for his former commander’s policy or decides to give a new direction to it with decisions that will now carry his authoritative stamp of approval rather than a nod from a deputy who works behind the scenes.