Urjit Patel navigates the most difficult year in RBI's history

Two months after he became governor, demonetisation invalidated 86% of bank notes in circulation

The governor managed FCNR redemptions & demonetisation, led RBI’s transition to inflation-targeting framework and institutionalised monetary policy decision making.

On his first day in office as the 24th governor of the Reserve Bank of India (RBI) on September 4, 2016, Urjit Patel kept things simple. Neither did he address the staff, nor did he entertain media requests to capture the handover ceremony from his predecessor, Raghuram Rajan.

One year after, and an eventful year at that, Patel hasn’t really opened up to bankers and the media as much as they would have liked him to. But he has not shied away from talking tough on several issues — be it farm debt waivers or asking for more capital from the government for banks to take a deep haircut on bad debt resolution. Patel has also made it clear that the RBI’s autonomy would be upheld.

Patel’s one year was one of the most difficult periods in the RBI’s history, say economists. Perhaps, it was even more difficult than the 1991 balance of payments crisis under S Venkitaramanan, when India had to pledge gold, or the credit crisis of 2008-09 when D Subbarao was governor.

Two months after he became governor, demonetisation invalidated 86 per cent of bank notes in circulation. Since then, the central bank has been in crisis management mode. Analysts say the initial response to the note ban reflected a lack of coherent planning, but the central bank did manage to bring the system back on its feet, and cash availability is no longer a problem now.

Last week, the RBI disclosed in its annual report that people may have returned almost 99 per cent of the scrapped Rs 15.44 lakh crore of notes. While the central bank was quick to report the returned scrapped notes till December 10 of Rs 12.4 lakh crore, it has taken the RBI nearly nine months to estimate the additional Rs 3 lakh crore. However, by disclosing the final estimate, the RBI has demonstrated the stellar integrity it enjoys in the world, which Patel has upheld uncompromisingly.

The RBI was aware of demonetisation, but how much time it had to prepare itself is not known. What is certain is that the central bank did bear the brunt of it. Patel did not speak in his defence, nor did he distance himself from the event.

“Urjit Patel is clearly one of the best governors the institution has ever seen, a thorough professional who worked under severely trying condition and gave his best,” said Madan Sabnavis, chief economist of CARE Ratings. While some may not agree with Sabnavis’ assessment, nobody can deny that Patel’s job was exceptionally tough.

“Navigating through the difficult times after demonetisation had been a huge challenge for the RBI. There were multiple and severe challenges — managing the huge currency needs of the economy and the large excess liquidity in the system, to name a few,” said Siddhartha Sanyal, chief economist of Barclays, applauding the governor.

Patel’s first challenge as governor was managing the $26-billion redemption on foreign currency non-resident (FCNR) deposits, which were contracted three years earlier at a time when the rupee was plummeting against the dollar. The repayment could have resulted in a liquidity crisis for the banking system, which Patel deftly managed to avert without any impact on the market.

Demonetisation led to a huge liquidity surplus, which the RBI managed through various cash management tools.

Sure, the RBI has been lucky with low oil prices and falling food prices, but the inflation rate hit its lifetime low of 1.5 per cent in June this year, justifying Patel’s moniker as an “inflation warrior”.

Patel is also the architect of the inflation targeting mechanism and was the first to preside over the six-member Monetary Policy Committee (MPC), which decides on policy rates instead of the governor alone. To its credit, the minutes of the MPC meetings show that not all members agree with the governor on rates, unlike what happens in such committees of developed countries’ central banks. 

Ravindra Dholakia, an external MPC member, holds no punches in his criticism of the RBI’s rate decisions and for missing inflation forecasts.

Most analysts do tend to side with Dholakia on this. Chief Economic Advisor Arvind Subramanian has roiled the RBI often with criticism for not cutting rates enough when the inflation rate was on a steep downward trajectory and growth momentum questionable. 

Analysts also say the RBI’s policy stance is not consistent, and that the central bank has flip-flopped quite often. From ‘accommodative’ it moved to ‘neutral’ and then held rates before cutting them.

Patel is also credited with moving decisively to resolve the bad debt problem of banks. Rajan did start the ‘recognition’ process through an asset quality review but could not finish the ‘resolution’. Patel’s move was decisive in this regard, pushing erring companies towards the Insolvency and Bankruptcy Code, but bankers say it is too bitter a medicine. The RBI’s stiff provisioning norms are bleeding banks, which are already suffering due to lack of capital. The provisions will only rise from here, which can potentially bankrupt some lenders.

Nevertheless, analysts say Patel’s legacy would be sealed by how the RBI manages to resolve the bad asset mess of about Rs 8 lakh crore. The RBI has been fully empowered by the government to take micro-level decisions about companies, but it remains to be seen if Patel’s RBI has the expertise to be both regulator and resolver at the same time.

Much has been said about the RBI’s autonomy, especially after the note ban. At a post-policy press conference, Patel proved he was in no mood to compromise on the RBI’s institutional sanctity.

When asked in the June monetary policy if the finance ministry calling MPC members for discussion on rates impinge on the RBI’s autonomy, Patel replied: “The meeting did not take place; all the MPC members declined the request of the finance ministry for that meeting.”

URJITSPEAK

On loan waivers
 

"It undermines an honest credit culture, it impacts credit discipline, it blunts incentives for future borrowers to repay. In other words, waivers engender moral hazard”

On transmission
 

"I think there is scope for banks to reduce lending rates for those segments that so far have not yet benefitted to the full extent of our policy rate cuts”

On banks and capital
 

"Swift time-bound resolution or liquidation of stressed assets will be critical for delogging the balance sheet and for efficient reallocation of bank capital" 

“The success and credibility of all the resolution efforts ...  would be critically contingent on the strength of the public sector balance sheets to absorb the costs”

On bank mergers
 

“As many have pointed out, it is not clear that we need so many public sector banks. The system could be better off if they are consolidated into fewer but healthier banks”

RBI governor Urjit Patel