Appointment of Urijit Patel as RBI governor signals policy continuity

Urjit Patel is the first central banker to be picked through a search process.

The appointment of Urjit Patel as the Reserve Bank of India's (RBI) new governor signals a strong likelihood of policy continuity, credit ratings agencies and analysts said.

"A central bank governor does not need to have a rock star status to be successful in reigning in inflation or cleaning up the banking sector," Fitch Ratings director, Asia-Pacific Sovereigns Group, Thomas Rookmaaker said. "From a rating perspective, policies are more important than personalities," he added.

"Having served as deputy governor in the past three years, Patel is well-positioned to further institutionalise these policy changes in the period ahead," Rookmaaker said.

Moody's said it would monitor for transmission of monetary policy and the clean-up of bad debt in the banking sector.

"We assume continuity of the RBI's policies under the new governor Patel," Moody's Investors Service SVP, Sovereign Risk Group Marie Diron said.

Inflation targeting
"The shift to inflation targeting at the beginning of last year has contributed to enhance the credibility and transparency of India's monetary policy. Future inflation developments will provide further indications of monetary policy credibility," said Diron.

Diron said two sets of policies and decisions by the Reserve Bank would be relevant to India's sovereign credit profile.

"First, efficient transmission of credible monetary policy fosters a stable macroeconomic environment with inflation at moderate levels. Second, banking sector risk weighs on India's sovereign credit profile. The clean-up of banks' balance sheet has started and it would be credit positive from a sovereign perspective, if it led to improved bank capitalisation levels, renewed loan growth and robust risk processes," Diron said.

The appointment of Patel, who is the first central banker to be picked through a search process that underscores the government's commitment to the RBI's autonomy, was also hailed by economists and analysts alike.

Rajya Sabha member Subramanian Swamy, a long-time critic of incumbent Raghuram Rajan for his US leanings, appears to be happy with the choice of the Kenyan-born Patel as the new governor. In the past few months, Swamy had openly lashed out at Rajan for his monetary policy, accusing that his decision to not lower interest rates has led to the economy being derailed from the path of recovery.

Swamy had also questioned Rajan's 'Indianess', calling him a US citizen. To a tweet on this, Swamy replied: "He is not Kenyan citizen but was. R3 (Reghuram Rajan)was born Indian & chose to continue his US Green Card even though in India from 2007."

Arundhati Bhattacharya, chairman of Indian banking giant SBI, said the appointment of Patel comes as a welcome move. "Dr Patel has been at the helm of institutionalising the inflation-targeting regime in the monetary policy framework. His appointment signals continuity of policy intent, both on part of the RBI and the government."

Gautam Chhaochharia, head of research at UBS Securities India, said the appointment of Patel as the RBI governor, along with recent reconfirmation of four per cent CPI inflation target, suggests a change in political economy and thus policy loosening may not be obviously imminent.

Positive transformation
Analysts are of the view that the positive transformation set in motion by Rajan, starting with the recognition of the problems associated with both high inflation and weak bank balance sheets, which is not yet complete, would continue to gain momentum under Patel.

Fitch rates India at 'BBB-minus' with a 'stable' outlook, while Moody's rates it at an equivalent 'Baa3' but with a 'positive' outlook.

Fitch also said India's sovereign ratings would not be affected solely by the departure of Rajan, adding the country's policies would be the main driver. The new governor would inherit a good opportunity to continue pursuing a policy of relatively low consumer price inflation and of strengthening banks' balance sheets, it said.

Most analysts believe that one of the biggest challenges for the new RBI chief is to encourage stubborn banks to cut borrowing costs more aggressively to boost the economy. Patel is most likely to persist with a slew of measures that Rajan had initiated. These include injecting more cash into the banking system and forcing banks to more quickly adapt to monetary policy changes when setting their lending rates.

Analysts point out that Patel has strong views on the RBI's contribution to India's growth. In a monetary policy review in January 2014, he said: "Don't try and put us into buckets. We are doing what is necessary for the economy. The primary focus is not the investors, not the markets, it is the consumer. How do we bring inflation down to the Indian consumer so that their welfare is improved?"

They believe Patel's first challenge would be to manage liquidity. He will also need to keep a watchful eye on inflation which is currently trending above the RBI's upcoming five per cent target, according to Pranjul Bhandari, chief India economist for HSBC Securities.

- issacjohn@khaleejtimes.com

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