Rajan reforms can thrive with India’s new RBI boss

August 22, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

India’s central bank is in good hands. Raghuram Rajan earned rock-star status as the governor of the Reserve Bank of India. His successor, Deputy Governor Urjit Patel, is relatively unknown but is well-placed to take over as a key architect of some of the critical reforms that are already underway.

Patel has had a ringside seat to policymaking over the last three years. The low-profile 53-year-old understands business as well as he does politics after stints at Reliance Industries, the International Monetary Fund, and acting as an adviser to the government. Like Prime Minister Narendra Modi, he hails from the relatively prosperous Western state of Gujarat.

Unlike Rajan, who took over mid-crisis, the incoming governor will inherit an economy in decent shape, with GDP growing at 7.9 percent, a stable currency and record foreign-exchange reserves. But Patel, who takes the reins on Sept. 4, faces three immediate challenges.

The first will be to control inflation as oil prices surge. Annual consumer price increases have just topped 6 percent, breaching the government’s target. If Patel cannot slow down these price rises, it will cast a pall on the formal inflation-targeting role that he helped convince the government to enshrine for the bank.

The second will be to ratchet up the fight against bad debt at state-controlled banks, which account for two-thirds of total loans. Rajan picked the low-hanging fruit by forcing lenders to acknowledge the problem. The logical conclusion requires Patel to convince New Delhi to stump up lots of new capital, ideally as soon as possible, or agree to privatisations. Neither option is politically palatable.

The third challenge will be to oversee a new monetary policy committee. Currently, the governor alone sets interest rates but a new six-member panel will take over before October. Patel must make a success of it even though a committee he led had advocated that RBI insiders should hold a majority of the positions. The final result gives New Delhi the power to appoint half of the panel.

If Patel can see through these landmark reforms, he can earn something close to celebrity status like his predecessor.

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