‘Hawkish’ Patel will be just as tough on inflation as Rajan

Urjit Patel’s appointment has come as surprise for many analysts and experts who thought that the Centre would appoint someone more dovish and amenable to demands from various stakeholders.

But Patel’s past record gives an insight as to why the Centre has gone for the man who has been the RBI Deputy Governor since 2013.

Prior to his appointment to deputy governor, Patel worked with the Boston Consulting Group, Reliance Industries and IDFC. He has previously held positions in the IMF, served as an adviser to the RBI (and worked as a consultant in the Finance Ministry. He holds an M. Phil degree from Oxford University and a Ph.D from Yale University.

Patel spearheaded the committee that recommended the current flexible inflation targeting (FIT) monetary policy framework. As the chairman of the committee, Patel clearly supports flexible inflation targeting in India. Patel has been supportive of the Centre’s proactive food supply management in controlling food inflation despite weak monsoons (in 2014 and 2015) and that the change in the government’s expenditure policy towards alleviating supply side constraints in infrastructure will create incremental disinflation.

More recently , he stated that, while the RBI would be watchful that ongoing stickiness in core CPI inflation does not “set a lower bound to the disinflation process”, he believes that weak rural wage growth should create downward pressure on services sector inflation.

“Given his preference for positive real interest rates and his fiscal conservatism, he is generally perceived as hawkish. However, it remains to be seen whether the RBI under his governorship would be as rigid about attaining the CPI inflation mid-point of 4 per cent,’ said analysts at Nomura.

Patel has not spoken much about the banking system but he has highlighted the need to examine the metrics for effective lending. In a speech made in Januray 2015, he had spoken about the need for banks to revisit the individual company/group credit exposure limits, as well as sector exposures as part of better risk management practices.

According to RBI insiders, he supports the liquidity framework introduced by the RBI in April 2015, under which the RBI has proposed to move from a structural deficit of around one per cent of NDTL to a position of broad neutrality over a period of 1-2 years.

In his report on flexible inflation targeting, he proposed that the RBI should eventually transition from the repo rate (overnight policy rate) to the 14-day term repo as the primary operating rate.

Analysts say that Patel had opposed the expansion of government subsidies in both food and petroleum products under the previous UPA government.

“He believes that the setting of minimum support prices, programs such as MGNREGS and the National Food Security Act can set off a wage price spiral, increasing the burden on monetary policy to lower inflation,” analysts at Nomura said.

In his report on flexible inflation targeting, he stated that the central government must reduce its fiscal deficit to three per cent by FY17 (current target is 3.5 per cent) and commit to eliminating administered setting of prices (MSPs) and wages (MGNREGS) for successful inflation targeting.

The key difference though would be the communication style. Compared to the rock-star image of Raghuram Rajan, Patel has maintained a low profile and is known as man of few words. But now as the boss of RBI, perhaps, that is one thing that will change.

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