 "Challenge before Patel to ensure undisruptive forex withdrawal")
Ensuring undisruptive redemption of $20-25 billion, inflation control and bank cleanup will be the main challenges that will face Urjit Patel, who takes over as the 24th Governor of Reserve Bank early next month.
A seasoned economist, Patel will have to appoint a member on the Monetary Policy Committee (MPC), deal with the problem of mounting non-performing assets (NPAs) of banking sector sand most importantly maintain the legacy of Raghuram Rajan.
Experts feel that appointment of Patel, who has worked with Rajan for several years, as the next RBI Governor will ensure continuity in the monetary policy.
When the rupee had a freefall due to 'taper tantrums' in the summer of 2013, plummeting to lifetime low of 67.85, India mobilised $26 billion through foreign currency non-resident bank account (FCNR-B) deposits by offering a special swap window for banks. The three-year deposits are maturing starting next month.
Rajan in his monetary policy review earlier in the month had said: "Reserve Bank will continue with both domestic liquidity operations and foreign exchange interventions that should also enable management of the FCNR(B) redemptions without market disruptions."
In order to deal with likely liquidity pressure, the RBI has been frontloading liquidity provision through open market operations and spot interventions/deliveries of forward purchases.
His other task would be to appoint a Reserve Bank nominee on the broad-based Monetary Policy Committee (MPC) which will decided on the interest rate with a view to maintaining inflation at 4 per cent with a plus/minus margin of 2 per cent.
Half of the six-member MPC will be from Reserve Bank and the remaining will be nominees of the government.
Outgoing Governor Rajan has appointed Patel and Michael Patra as RBI nominees to the MPC which will be headed by the central bank Governor himself.
With Patel becoming Governor, RBI will have to appoint another member for the all important committee which will set the interest rate at the next policy review on October 4.
The government has earlier notified 4 per cent inflation target for the next five years, based on which the MPC would take its monetary policy decisions going forward.
The move, which provides for a margin of plus or minus 2 per cent in this target thus fixing the upper tolerance level at 6 per cent till 2021, is being seen as government putting the seal on outgoing Governor's inflation-first model of monetary policy.
With the setting of MPC, the interest rate setting powers would move from RBI Governor to the panel.
One of the important tasks before Patel would be to
continue Rajan's unfinished agenda of cleaning up balance sheets of public sector banks and bring down the level of NPAs in the sector.
The NPAs of the scheduled commercial banks have risen from 5.43 per cent in March 2015 to 9.32 per cent in March 2016, and according to a RBI report, may go up further to 10.1 per cent by the end of the current fiscal.
The gross non-performing assets (GNPAs) of public sector banks increased Rs 2.16 lakh crore in 2013-14 to Rs 4.76 lakh crore in 2015-16.
According to a report, top 100 borrowers of public sector banks owe nearly Rs 14 lakh crore to them. The wilful defaulters as a percentage of GNPAs as on March 2016 was 16.09 per cent.
The government has attributed rise in bad loans to a host of factors such as domestic growth sluggishness in the recent past, slowdown in recovery in global economy and continuing uncertainty in global markets, leading to lower exports of various products like textiles, engineering goods, leather and gems.
The other factors responsible for the rise in NPAs include ban on mining projects, delay in clearances affecting power, iron and steel sector, volatility in prices of raw material, shortage in availability of power and also aggressive lending by banks in the past.
Among other things, Patel will also have to oversee ongoing consolidation in the public banking space.
State Bank of India (SBI) already unveiled its plan to merge five associate banks -- State Bank of Bikaner & Jaipur (SBBJ), State Bank of Mysore (SBM), State Bank of Travancore (SBT), State Bank of Patiala and State Bank of Hyderabad with itself and acquire Bharatiya Mahila Bank.
A seasoned economist, Patel will have to appoint a member on the Monetary Policy Committee (MPC), deal with the problem of mounting non-performing assets (NPAs) of banking sector sand most importantly maintain the legacy of Raghuram Rajan.
Experts feel that appointment of Patel, who has worked with Rajan for several years, as the next RBI Governor will ensure continuity in the monetary policy.
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His immediate task, however, will be to ensure redemption of $20-25 billion of FCNR(B) deposits in the coming months remain undisruptive.
When the rupee had a freefall due to 'taper tantrums' in the summer of 2013, plummeting to lifetime low of 67.85, India mobilised $26 billion through foreign currency non-resident bank account (FCNR-B) deposits by offering a special swap window for banks. The three-year deposits are maturing starting next month.
Rajan in his monetary policy review earlier in the month had said: "Reserve Bank will continue with both domestic liquidity operations and foreign exchange interventions that should also enable management of the FCNR(B) redemptions without market disruptions."
In order to deal with likely liquidity pressure, the RBI has been frontloading liquidity provision through open market operations and spot interventions/deliveries of forward purchases.
His other task would be to appoint a Reserve Bank nominee on the broad-based Monetary Policy Committee (MPC) which will decided on the interest rate with a view to maintaining inflation at 4 per cent with a plus/minus margin of 2 per cent.
Half of the six-member MPC will be from Reserve Bank and the remaining will be nominees of the government.
Outgoing Governor Rajan has appointed Patel and Michael Patra as RBI nominees to the MPC which will be headed by the central bank Governor himself.
With Patel becoming Governor, RBI will have to appoint another member for the all important committee which will set the interest rate at the next policy review on October 4.
The government has earlier notified 4 per cent inflation target for the next five years, based on which the MPC would take its monetary policy decisions going forward.
The move, which provides for a margin of plus or minus 2 per cent in this target thus fixing the upper tolerance level at 6 per cent till 2021, is being seen as government putting the seal on outgoing Governor's inflation-first model of monetary policy.
With the setting of MPC, the interest rate setting powers would move from RBI Governor to the panel.
One of the important tasks before Patel would be to
continue Rajan's unfinished agenda of cleaning up balance sheets of public sector banks and bring down the level of NPAs in the sector.
The NPAs of the scheduled commercial banks have risen from 5.43 per cent in March 2015 to 9.32 per cent in March 2016, and according to a RBI report, may go up further to 10.1 per cent by the end of the current fiscal.
The gross non-performing assets (GNPAs) of public sector banks increased Rs 2.16 lakh crore in 2013-14 to Rs 4.76 lakh crore in 2015-16.
According to a report, top 100 borrowers of public sector banks owe nearly Rs 14 lakh crore to them. The wilful defaulters as a percentage of GNPAs as on March 2016 was 16.09 per cent.
The government has attributed rise in bad loans to a host of factors such as domestic growth sluggishness in the recent past, slowdown in recovery in global economy and continuing uncertainty in global markets, leading to lower exports of various products like textiles, engineering goods, leather and gems.
The other factors responsible for the rise in NPAs include ban on mining projects, delay in clearances affecting power, iron and steel sector, volatility in prices of raw material, shortage in availability of power and also aggressive lending by banks in the past.
Among other things, Patel will also have to oversee ongoing consolidation in the public banking space.
State Bank of India (SBI) already unveiled its plan to merge five associate banks -- State Bank of Bikaner & Jaipur (SBBJ), State Bank of Mysore (SBM), State Bank of Travancore (SBT), State Bank of Patiala and State Bank of Hyderabad with itself and acquire Bharatiya Mahila Bank.