Over to Urjit Patel

The Centre, after taking its time to decide on Raghuram Rajan’s successor, has made a sensible choice by choosing Urjit Patel. The move signals continuity in monetary policy, which should come as a relief to investors who were unnerved by the manner in which Rajan was virtually forced to leave. Patel, like Rajan, has trained and served in the West, having worked with the IMF; he should know a thing or two about managing investor expectations. A Reserve Bank of India deputy governor since January 2013, Patel is best known for being the main force behind the RBI’s shift from ‘multiple indicators’ to inflation targeting as the ‘anchor’ or goal of monetary policy. The Urjit Patel committee report on this subject was incorporated into policy soon after it was published in January 2014. With Patel at the helm, the RBI is likely to continue with an uncluttered, transparent policy goal — keeping consumer price inflation under check — for the benefit of investors and consumers. Patel will be the key member in the monetary policy committee, which is likely to preside over the October policy review. The MPC — in fact, an institutional reform suggested by the committee — signals a shift towards a consultative approach to monetary policy that will hopefully cut out needless sparring between North Block and Mint Street, instead holding both parties accountable for policy decisions. However, the challenge for Patel, who was an advisor in the ministry of finance in NDA-I, is to safeguard the RBI’s autonomy amidst this institutional transition.

Despite having been in the RBI for over three years, Patel has kept a low profile. His views on burning subjects such as NPAs are not really known. He should give the recently started S4A (Scheme for Sustainable Structuring of Stressed Assets) — which tries to strike a balance between reviving assets and writing them off — a fair run in a still-tepid industrial climate. The Patel panel report argues for an inflation-targeting RBI on the ground that monetary policy does not influence growth and employment, the way factors such as productivity, labour reforms and responsible fiscal policy can. While focusing on prices and self-fulfilling ‘inflationary expectations’, the MPC should not veer towards a monetary and fiscal policy regime that throttles growth altogether.

It is just as well that an inflation targeting RBI goes by consumer rather than wholesale prices. However, the relationship between the wholesale price index and consumer price index must be closely watched. The WPI should evolve into a full-fledged producer price index, including services as well (efforts are on in this regard), so that the gap between wholesale and consumer prices can be taken to reflect intermediation costs. Research, for instance, points to WPI influencing CPI rather than vice-versa, which is to say that higher retail prices do not significantly feed into costs of production through the wage loop. Gathering such information will lead to more informed decisions by the MPC, and other arms of government. The onus is on Patel and the MPC to blend continuity and change in the right measure.

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