Economic Highlights

New Delhi, 14 September 2016

New RBI Governor

WILL HE FOLLOW RAJAN POLICY?

By Dhurjati Mukherjee

The new RBI Governor, Urjit Patel, comes at a critical time faced with many challenges in maintaining the legacy of his predecessor, Raghuram Rajan. Ensuring undisruptive redemption totalling $20-25 billion, getting used to the idea of a Monetary Policy Committee and cleaning the balance sheets of the banks would have to be accomplished by Patel as early as possible. Special mention would be the way he works with the Committee and getting to the objective of meeting the inflation target.

The Governor needs to reinforce and continue the faith that the external world and Indian markets have in the independence and objectivity of the central bank. Thus, one of his important tasks would be to prevent any confrontation between the RBI and the Finance Ministry. There would be a need to show utmost tact in this regard so that the RBI can function with a certain amount of autonomy. However, experts are doubtful whether the Government would allow the RBI to do so and it may be mentioned that Patel had chaired the expert committee to revise and strengthen the monetary policy framework.

A major problem today before the RBI Governor is the financial condition of the major PSU banks, which have been struggling with non-performing assets (NPAs). Some of these have not declared any dividend for the last financial year due to negative net profit. While this has emerged a big challenge, it would indeed be difficult for the Governor to do something magical despite hopes for possible positive action by him  

The legacy of Raghuram Rajan still hovers over the present incumbent. In particular, his frank views on the economy, often contradicting important functionaries of the Government, had raised eyebrows. He even had the temerity to question the rationale of the Prime Minister’s slogan of ‘Make in India’ by pointing out that at present it was difficult to visualize India as a global hub. Instead, he argued that efforts should be to ‘Make for India’ since the domestic market was quite large. 

One cannot deny the fact that unless more autonomy is given to the RBI, it would be difficult for the situation to undergo any major change. It was also Rajan who had voiced this demand but it didn’t go down well with the Government. As is well known, while there is lot of talk in favour of decentralization, the Government doesn’t want such financial devolution to become a reality.

A burning question today is the revitalization of banks and an action plan needs to be formulated and announced at the earliest. One cannot deny the fact that improving the strength of the banking system as a whole has been Rajan’s most notable contribution. He was instrumental in focusing attention on the need for banks to reduce the proportion of non-performing assets in their portfolio. In fact, during the past three years, the RBI introduced a number of policy measures aimed at helping banks to clean up their balance sheets. 

Whether the new RBI chief would follow this line of action in right earnest remains to be seen but, experts believe, he will not be in hurry to come out with any drastic plan or announcement. Moreover, indications point to the fact that Patel would not be bold enough to air views that may not be to the liking of the Government. This complacency would not help make the RBI a powerful force and instead make it an appendage of the Finance Ministry.  

A healthy future of the banking industry is critical to the economy. For this to happen, the RBI has a major role to play through strict monitoring and ensuring that its guidelines are followed by the banks. Further, the dimension of political pressure being exerted by corporate houses to get loans would have to be done away.  

Another aspect of Rajan’s legacy was the way he targeted inflation as his interest rate policy gave overwhelming primacy on this aspect. Several economists, who mainly owe allegiance to the present Government, argued that he erred on the side of caution by refusing to lower the interest rate regime even during times when prices seemed to be relatively stable. However, only time and more careful analysis will tell whether his actions were correct or not. 

Meanwhile, the rating agency, Moody’s Investor Services, has suggested that RBI should continue with Rajan’s policy on inflation. His policy of having a tight leash on inflation proved fruitful and showed results. The RBI should continue with similar policies and communication, is what Marie Diron of the agency pointed out in a recent interview.     

The Government recently notified an inflation target of four per cent for the next five years, which the proposed Monetary Policy Committee (MPC) of the RBI would have to achieve through its interest-rate setting policies. The Government has proposed a margin of plus-minus two per cent for the CPI inflation target, fixing the upper tolerance level at six per cent till 2021, which has to be adhered to.

A section of experts believe that the implementation of the Goods and Services Tax (GST) may push up inflation further, which would be a challenge for Patel. However, its monetary policy with a tight leash on inflation is important for the country where in the past inflation had risen to very high levels, negatively affecting growth and investment prospects. 

Another aspect which the new Governor may have to see is in the area of priority sector lending. Farmers and micro and small entrepreneurs need funds to their business, specially for expansion. Sometimes they have to borrow from unscrupulous moneylenders. If the RBI could help in guiding banks in ensuring that these segments get their requirements, this would be a step in the right direction.

The main challenge before Patel is to make the Indian banking industry big and strong with a wider outreach. As is well known, the Government’s policy of financial inclusion has made a steady beginning. Thus, banks have to be motivated in the right direction and all types of loopholes need to be plugged. It remains to be seen whether a monetary expert like Patel would be successful in accomplishing this in his tenure. ---INFA

(Copyright, India News and  Feature Alliance)