Raghuram Rajan era ends at RBI; new Governor Urjit Patel likely to continue policies

Raghuram Rajan on Sunday completed his three-year tenure as the Governor of the Reserve Bank of India (RBI), bringing the curtain down on an eventful period that witnessed several charges, counter-charges on inflation, growth and interest rates as well as financial sector reforms. Urjit Patel, who was Deputy Governor in charge of the monetary policy, will be taking over as the next RBI Governor on Tuesday as Monday (September 5) is a holiday for the central bank. The government is expected to announce a new Deputy Governor for the Monetary Policy Department in place of Urjit Patel soon, government sources said. On Saturday, a day before demitting the office, Rajan said: “My parents could give me a wonderful childhood and a great education in this country. We all grow up with such debts, and public service is a way to partially repay them. However, the last few years, working with dedicated colleagues at the RBI and the finance ministry, have been so fulfilling that I think I have received rather than given.” Talking about his tenure, Rajan said: “I believe we have undertaken important reforms in payments, in banking, in the conduct of monetary policy and liquidity management, in financial markets, and in the resolution of distress, as well as within the RBI itself. Only time will tell whether they will have lasting impact, but I tried to do the best job I could, without fear or favour.” Patel has been given a term of three years, which is the same as was assigned to Rajan. The monetary policy henceforth will be based on a consultative process where the Monetary Policy Committee (MPC) meets and decides on interest rates. Presently the RBI has a technical committee where the RBI Governor can overrule the majority consensus. However, in case of the MPC, the decision taken will be based on majority voting. If there is a tie, then the views of the Governor will prevail. Otherwise the majority vote would prevail even if the Governor’s view is on the other side. “The conjectures on Patel’s stance on monetary policy appear to be quite clear and it may be expected that inflation targeting would be the order. This agreement also talks of the RBI giving detailed explanations on the movement in inflation rates as well as the measures that were taken by the central bank to control the same,” said a Care Rating report. While retail inflation is above 6 per cent, it is expected to come down over the next few months especially after October, and the trajectory and pace of movement will determine when the RBI may choose to lower rates. “Patel’s appointment should bring cheer for markets as there won’t be a major disruption in RBI policies. He would strive to have a stable currency and a well-managed inflationary environment as the current outgoing Governor has been doing,” said Saravana Kumar, CIO, LIC MF. “The process of cleansing of banking sector balance sheet and issuance of on-tap banking licence that the RBI had initiated lately under Rajan should also be maintained,” said Dhananjay Sinha, head, institutional research, Emkay Global Financial. The continuity of inflation focus will remain under the new leadership, especially because Rajan leaves after establishing the monetary policy committee, he said.