NEW DELHI—India appointed Urjit Patel as its next central bank chief Saturday, picking from the Reserve Bank of India’s current roster of leaders in what economists and executives hope is a sign of New Delhi’s commitment to the inflation-fighting policies of departing governor Raghuram Rajan.
Mr. Patel is currently a deputy governor at the RBI. He has been appointed for three years and will begin his term once Mr. Rajan steps down on Sept. 4.
“It’s a continuation of Mr. Rajan’s regime,” said Madhavi Arora, economist at Kotak Mahindra Bank Ltd. “Had the government wanted someone more dovish than Mr. Rajan, they would have picked someone else.”
Mr. Rajan, who took the helm of the RBI in 2013, is widely credited with helping arrest the rupee’s decline against the dollar and bringing down the country’s inflation rate. He surprised economists and investors in June when he said he would go back to academia and not serve a second term atop the central bank.
Mr. Rajan was criticized by some politicians and business leaders for being too outspoken on matters other than monetary policy and for not doing enough to boost growth in Asia’s third-largest economy, according to senior government officials.
He has been popular, however, with most international investors, who have credited him with bolstering the RBI’s independence. Many said they will be watching closely to see if his successor continues to resist pressure from New Delhi to be more dovish.
Mr. Patel, 52 years old, who was appointed deputy governor in 2013, was the key official responsible for the central bank’s shift toward a monetary policy based more on consumer inflation. He headed the RBI panel that recommended the central bank use a target range of the consumer-price inflation rate. Before adopting Mr. Patel’s recommendations, the RBI used many different indicators—including growth, employment, inflation and the exchange rate—which critics of that approach said had added to investors’ uncertainty.
“As the Deputy Governor of RBI, Dr. Urjit Patel has played a key role in developing the new monetary policy framework that has focused on reining in inflation and has imparted stability to the currency,” said Chanda Kochhar, chief executive officer at ICICI Bank Ltd., in a statement Saturday. “His appointment would ensure a smooth transition and continuity in monetary policy, as India puts in place major structural reforms to transition to a higher growth path.”
Mr. Patel takes over at the RBI as it undergoes a structural overhaul and begins to clean up banks’ balance sheets.
Markets have been facing rising uncertainty: Since U.K. voters opted out of the European Union in June, global growth forecasts have been downgraded, and banks in countries like Italy and Portugal have been looking increasingly shaky. Investors expect another interest rate increase in the U.S., which will lift yields on dollar-denominated assets and cause aftershocks in emerging markets like India.
While India is officially the world’s fastest-growing large economy, with an expansion rate of 7.6% in the fiscal year ended March, many indicators paint a less rosy picture. In several industries, including construction, activity is sluggish. Its industrial production is weak and exports have been falling for most of the past two years.
Many of India’s small companies say loans are still too expensive despite Mr. Rajan’s five rate cuts and that the prices they charge for their products are barely rising. They say Mr. Rajan’s lending-rate reductions, which took India’s benchmark to its lowest level in five years, haven’t been enough. Many in Prime Minister Narendra Modi’s Bharatiya Janata Party agree.
Rising consumer prices are also an issue the new governor will have to address. Mr. Patel is less likely to get inflation-fighting assistance than did his predecessor from falling commodity prices. India’s Consumer Price Index rose 6.07% in July year-on-year, gaining more than 1 percentage point since March and crossing the upward limit of the RBI’s target inflation rate.
He also will be restricted by a recent overhaul in the bank’s policy-making structure. For the first time, he will have to share his decision-making power with a six-person monetary policy committee where half the members are appointed by the government. The new structure is a radical departure from the past, when the onus of rate decisions rested with the governor alone. The RBI chief still has the deciding vote if there is a tie.
Mr. Patel’s first test is likely to come in September, when nonresident Indians start to redeem more than $ 20 billion in foreign-currency bonds Mr. Rajan encouraged banks to issue as a way of attracting funds to India and supporting the rupee. India will have to pay back most of the money by November. Singapore-based DBS Bank Ltd. predicts that only $ 5 billion will be rolled over.
Another challenge he faces is the mountain of bad debt at the country’s government-owned banks. The RBI estimates bad loans in the system would likely reach 8.5% of total loans next year, up from 7.6% in March.
The RBI’s deadline for banks to clean up their balance sheets—March 2017—is fast approaching, and the remaining non-performing assets are expected to continue to sap the banks’ lending capacity. This restriction has been keeping the benefits of multiple rate cuts from trickling down into the economy and could hamper expansion prospects.