Urjit Patel took over as 24th governor of the Reserve Bank of India (RBI) on Sunday. However, the ceremonial scroll signing exercise, which transfers the power from a former governor to a new one will happen today, on Tuesday, after the central bank opens following two consecutive holidays.
As governor, Patel faces a host of immediate challenges that he will need to tackle. For the smooth resolution of these, he will need to constantly communicate with the market and the banking sector at large. Given that the former deputy governor of the RBI is not exactly known for his public communications, he will likely need to be more voluble in public in his new role.
1. Redemption of FCNR (B) deposits
The Reserve Bank of India (RBI) raised about $26 billion through these deposits in September-November 2013. Most of the deposits are getting due this year and the central bank has guided that the resultant dollar outflow (about $20 billion) could create temporary liquidity crisis in the market. Given that the central bank has built up a formidable reserve and solid long position in the forwards market, the redemption in itself won’t be a problem. But there could be a short term blip, which the new governor will likely need to talk down in the market.
2. Inflation
Inflation has started inching up, led by food prices even as global commodity prices, particularly of oil, has started ticking up. Retail inflation for July crossed 6%, much higher than RBI’s target range. But the central bank expects the August number to be softer. In any case, the target of bringing down inflation to 5% by March 2017 should be achievable, given a good monsoon. However, if inflation continues to remain high, it would seriously jeopardise RBI’s efforts in containing long term inflation at 4%, as per the monetary policy framework’s inflation targeting model, of which, Patel is the key architect.
3. Growth push
Raghuram Rajan was criticised for his strong stance against inflation and for not reducing rates enough. The new governor may have to cut rates sharply to let growth take place in a broadbased manner. Certainly, this is what the government and the industry body want. But Urjit Patel’s appointment has also signaled a continuation of RBI’s hawkish stance. It will be interesting to see how the new governor balances industry expectations with his target of containing inflation.
4. Asset quality resolution
Public sector banks’ gross bad debt neared Rs 6 lakh crore at the end of fiscal 2015-16 as banks reported heavy bad debts under RBI’s asset quality review. The challenge that remains now is how the central bank will go about with the resolution process as RBI’s previous schemes have not been very effective.
5. Public sector bank capitalisation
Indian banks need more capital to meet credit demand at a growing economy. For now the capital is adequate, but has seen serious erosion with the rise in bad debts. So much so that the erosion was even higher than government’s capital infusion of about Rs 25,000 crore.
6. Bank consolidation
The government has already taken the first step by announcing that the associated banks of State Bank of India will be merged with their parent. It also wants to privatise IDBI Bank as a precursor to larger consolidation move in the Indian banking industry. The new governor will have to oversee the consolidation.
7. Monetary Policy Committee
Patel will be the first governor who would be part of a monetary policy committee to decide on policy rates. It will be expected of the governor to maintain RBI’s own agenda of protecting inflation and not get swayed by government representatives in the board who will no doubt want softer rates to push up growth.
8. Development of bond and forex market
One long term agenda for the new governor will be the development of the corporate bond market and seeing through the bond and foreign exchange market reforms measures that former governor Rajan announced a few days before his term ended. Given the measures were done in consultation with Patel, it can be safely assumed that Patel has his own vision on the matter, which he may spell out in the days ahead.
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