The Indian government has appointed Urjit Patel, a deputy governor in charge of monetary policy at the central bank, to replace Raghuram Rajan as the next governor of the RBI.
“The Appointments Committee of Cabinet has approved the appointment of Dr Urjit R Patel as Governor, Reserve Bank of India for a period of three years,” the government said in a statement on Saturday.
The Yale educated Mr Patel is widely seen as a safe pair of hands and his appointment implies a continuity of monetary policy at the central bank, particularly since he worked closely with Mr Rajan on key reforms during his tenure.
Mr Patel “is the architect of the current monetary policy regime” said Citi’s Samiran Chakraborty and Anurag Jha in a recent note to clients.
The fiscally conservative Mr Patel “recommended the adoption of a flexible inflation targeting framework, a shift in nominal anchor from [wholesale price inflation] to headline [consumer price inflation] and the formation of a Monetary Policy Committee, all of which was accepted by the government and RBI.”
However, Mr Patel will most probably not have the benefit of falling commodity prices to help in the fight against inflation. CPI inflation rose to 6.1 per cent year on year in July, from 5.8 per cent in June, and just above the RBI’s 6 per cent ceiling.
The new governor will also have to operate within the constraints of the Monetary Policy Committee he helped to set up. The six man MPC, on which the governor will have the tiebreaking vote, will include three members appointed by the government and, as such, Mr Patel will have to be a consensus builder.
Mr Rajan, a former IMF chief economist, announced in June his decision to step down from his post when his initial term at the RBI ends in September.
Over the last two decades, all governors of the Reserve Bank of India have been granted two-year extensions after they completed their first three-year terms. Mr Rajan is returning to academia amid speculation that he was pushed by vocal elements in the government in Delhi.
The announcement of his departure was broadly described as a negative surprise, as he had gained widespread praise for his central role in restoring the country’s macroeconomic stability and his efforts to clean up bad loans weighing down India’s bank balance sheets.
“Dr Rajan added credibility to the RBI and policymaking in India, especially during times of heightened external turbulence, and there is no obvious successor of a similar stature,” said Nomura’s Sonal Varma in June.
“Dr. Rajan’s exit could slow down the process of bank restructuring, particularly if the new governor is not as firm about bad loan recognition,” she added.
While Mr Patel’s appointment will reassure investors that the RBI’s focus on inflation will continue, he is also seen as lower-profile than Mr Rajan and there is an expectation that he will look to come into conflict less often with the government than his predecessor.
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