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India taps insider Patel as central bank head, seeking continuity
[MUMBAI] Reserve Bank of India insider Urjit Patel won a promotion to run the central bank on Saturday with a mandate to cement the bank's commitment to keeping inflation low, as the tenure of the man he is replacing draws to a turbulent conclusion.
Raghuram Rajan, a former International Monetary Fund chief economist feted as a "rock-star" central banker by investors, took financial markets by surprise in June by announcing he would return to academia after a single term as head of the RBI.
Prime Minister Narendra Modi ended two months of ensuing uncertainty by picking Mr Patel, Mr Rajan's 52-year-old deputy and a driving force behind the RBI's transformation into an inflation-targeting central bank.
Mr Patel's appointment will reassure markets by offering the promise of monetary policy continuity just as inflation ticks higher, though he is likely to face pressure from government officials who would like interest rates to come down. "He is the architect of inflation targeting. Investors don't want any change in policy direction," said Devendra Kumar Pant, chief economist at India Ratings & Research.
Mr Patel will also need to address a clean-up of bad debts at banks that has prevented credit from flowing into India's US$2 trillion economy, which is one of the world's fastest growing but is not generating enough jobs to cater for an expanding workforce.
At home, he is seen as carrying less political baggage than Mr Rajan, which may help Mr Patel in his dealings with Mr Modi and Finance Minister Arun Jaitley.
Mr Rajan faced a backlash from hard-right elements in Mr Modi's Bharatiya Janata Party (BJP) for the social criticism he sometimes resorted to in his public statements. Mr Patel is little known on the conference circuit and has refrained from making major policy speeches while deputy governor. "He (Patel) should continue to work with the government on reducing long-term inflation expectations and maintain stability in the currency," said Mihir Vora, Chief Investment Officer of Max Life Insurance in Mumbai.
"The measures to address (non-performing asset) issues of public-sector banks should continue. However, a lot more needs to be done to lay out a plan for capitalising these banks." Mr Patel, who headed a shortlist of candidates that also included IMF Executive Director Subir Gokarn and World Bank Chief Economist Kaushik Basu, will start his three-year term on Sept 4.
An aide to Mr Modi praised Mr Patel as "young and dynamic" and with a wide international policy perspective. Mr Patel also worked at the IMF as an economist from 1990 to 1995, and for Boston Consulting Group and Indian conglomerate Reliance Industries .
As deputy governor, he headed a panel that recommended landmark changes to monetary policy in India, including a switch to inflation-targeting and the creation of a committee to set interest rates.
Mr Modi backed that inflation target of 4 per cent, within a range of 2 to 6 per cent, in his annual Independence Day speech on Monday.
But Mr Patel takes over at a time when consumer inflation has risen above that range, accelerating to 6.07 per cent in July, the fourth consecutive month above the RBI's near-term target of 5 per cent.
Analysts said bond markets would likely fall initially given expectations Mr Patel, like Mr Rajan, would keep interest rates on hold in the near term.
Mr Patel was reappointed in January as deputy governor in charge of monetary policy, a department he has run since 2013 after first being appointed by a Congress-led government.
He will now get to implement the policies he helped shape and that have substantially changed the role of the RBI governor from that of final arbiter of policy to first among equals.
The government is soon expected to announce the lineup of the six-member Monetary Policy Committee to decide on interest rates. It will be made up of Mr Patel and two other RBI officials, along with three members appointed by the government.
That arrangement may benefit from the presence of a consensus-builder in the mould of some central bank heads in developed markets. But some within the RBI describe Mr Patel as a moody man who avoids social interaction and huddles only with close aides. "He has an abrasive personality," said one RBI official who has worked with him. "At a time when RBI policy will be decided by a monetary policy committee, good communication skills are a necessity, which are lacking in him."