The reticent Patel perhaps has an advantage as he hardly speaks. But his decisions to put his foot down on fight against inflation can create conflict with the government agenda of high growth. US Federal Reserve chair Janet Yellen is perhaps not on the best of terms with US President Donald Trump, but she is known to have a good working relationship with Steven Terner Mnuchin, the current treasury secretary of the US. It’s a long convention in the US — breakfast or luncheon meetings between the Fed chair and finance secretary are as common as Indian cricketers hobnobbing with Bollywood celebs.
The story in India is different. Reserve Bank of India Governor Urjit Patel and other Monetary Policy Committee (MPC) members had refused to meet the finance ministry panel for discussions on the monetary policy before the June review, apparently to avoid any possible pressure from the government which was longing for a rate cut. The MPC ultimately stood its ground for a status quo. While the rejection to meet the government panel was seen as a rift between the central bank and the fiscal authority in Delhi, it helped the taciturn Patel, who many would argue was never there during the controversial demonetisation, to make a statement on central bank’s independence.
The MPC, where RBI governor is a member, withstood the pressure earlier too and kept RBI’s stance neutral in February review warding off inflationary pressure which helped the Consumer Price Index come down to 1.54% in June, the lowest since 1999. RBI continued to be neutral in its August review even after reducing the repo rate by 25 basis points. This is a steely fight against inflation in letter and spirit with a headline inflation target as low as to 2.0-3.5% for the first half and 3.5-4.5% for the second half in FY18.
Earlier, Patel was seen as going into a cocoon, especially during the most eventful demonetisation months, when the then economic affairs secretary Shaktikanta Das had clearly taken the lead in handling the situation. Many believed that the lack of direct communication from the 24th governor along with some confusing RBI notes made the matter worse which anyway was bound to be a mess for its lack of planning. But now, even his critics accept that post demonetisation, Patel took several strong steps to regain his stature and independence as RBI governor.
“RBI has handled the pressure from the government well after demonetisation,” says Partha Ray, professor of Economics at IIM Calcutta. “It has developed cold feet about the proposed bad bank, which would have been otherwise a disaster if implemented. Patel has also put his foot down on agriculture debt waiver. He played the dharma of a classical central bank governor,” Ray says.
To be fair to Patel, one would argue that it is extremely difficult for anybody coming after someone like Rajan because of the IMF economist’s larger than life stature.
Patel has four major achievements to write home about in his first year, says CARE Ratings chief economist Madan Sabnavis. “Ensuring that the forex situation was unaffected by the FCNR deposits outflow is very creditable. Then, taking on the NPA situation of banks after the annual quality review, third, getting the MPC working on policy options and ensuring that the rules are followed,” he says.
Sabnavis adds that given the constraints of time and secrecy which went into the government’s decision to demonetise, the central bank did pretty well with logistics gaps being the only lacunae which could not be avoided. The central bank managed a huge liquidity overhang after demonetisation by impounding excess cash and prevented bond yields from plummeting.
The next one year will be equally challenging for Patel, who was trained in Economics from Yale University. While he is credited with keeping the local currency steady during the last quarter of 2016 when $26 billion flew out from Indian shores on account of FCNR-B deposit redemptions, the 6% surge in rupee against the dollar the following year brings a fresh challenge for the governor. The rupee gain helped the government save substantially on import bill, but he perhaps needs to hold the rupee from appreciating further to keep exports competitive.
The NPA build-up has put in enough stress in the banking system and it now depends on RBI as to how it guides banks in terms of asset recognition and save the lenders from more blushes. The jury is still out on how RBI’s direct intervention would play out in India’s insolvency resolution exercise. The government decision to initiate merger between public sector banks needs RBI policy push to create a smooth and enabling passage.
There is bound to be conflict between the fiscal and monetary authorities as their immediate goal at times is different. “There are some areas where you have a duty to warn, to persuade, to sometimes say no… You cannot be a fifth column inside government, undermining the legitimate right of the government to decide,” says Rajan in an interview to Time of India.
There are instances when past RBI governors shared complex relationship with the fiscal authorities. Yaga Venugopal Reddy wanted to quit twice due to differences with Palaniappan Chidambaram. His successor Duvvuri Subbarao too had a frosty relationship with two finance ministers — Chidambaram and Pranab Mukherjee. The outspoken Raghuram Rajan was also not liked by the BJP camp for holding interest rates steady for long and creating flutter by questioning government schemes such as ‘Make in India’ and criticising rising intolerance.
The reticent Patel perhaps has an advantage as he hardly speaks. But his decisions to put his foot down on fight against inflation can create conflict with the government agenda of high growth, especially when GDP expansion has slowed to 5.7% in the April-June quarter, a three-year low.
However, the governor has shown enough mettle to warn and be a hawk and keep fighting for a low inflation regime.