What we think about the appointment of Urjit Patel as the governor of RBI?

Firstly, let’s all congratulate Dr. Patel and wish him luck for his upcoming tenor as the head of our central bank!

Dr. Patel has large shoes to fill, especially because of the high standards set by Dr. Rajan, who has been exceptional, not only in terms of policy making, but also with regards to creating a positive image and respect for RBI in global economic circles.

Having said that, I believe Dr. Patel is the best man for the job, and comfortably beat the rest of the contenders. Given the circumstances, I believe the Modi government made a good choice. For me, the things that work for Dr. Patel are:

• Strong Academic Background – He received his training in Economics from the London School of Economics, Oxford University and Yale. He has written extensively on the financial sector, and on the optimal role of governments in business. As they say, Dr. Patel knows his stuff
• Actual Policy Making Experience – This one is really crucial. Since the last 3 years, he has been the Deputy Governor, assisting in real policy making. That means he needs to waste no time in getting used to the infrastructure or the hierarchy of the RBI. He knows everyone in the office and also understands how things work. Besides, he also spent time at the IMF, which allows one to look at the country in a little more external and hopefully, impartial manner. Bottom-line, he can get to doing business fast!
  • Urjit Patel Committe – An offshoot of the above point is the fact that he headed a high level committe, whose findings potentially changed the way monetary policy works in India by
    • Shifting from WPI to CPI*
    • Setting the 2%-6% target range for CPI
    • A team deciding the policy rate in stead of one person alone
• Inflation Hawk – As just discussed, Dr. Patel changed the way RBI sets policy targets by moving from WPI to CPI for inflation targeting. He has been strong critique of Subbarao’s policies, which had led to massive inflation in the country. As such, I believe he will be vary to decrease real rates* below zero (currently around 50bps).
• Private Sector Exposure – His stint with the BCG and Reliance Industries imply that he knows how it is to be on the other side, doing business in India. Hopefully, he will be able to leverage this know-how to get the private and the public sectors together, for better transmission of monetary policy.

Therefore, I believe this is the right choice by the government. The possibility of an October rate cut just halved I believe!

Thanks

*WPI – Wholesale Price Index, CPI – Consumer Price Index

**Real Rates – Various measures, as a standard thumb rule use Repo Rate – CPI