How the Governor quietly steered the RBI over the last year…

Come September and Dr. Urjit Patel completes one year in office. The year gone by has been eventful, to say the least. Let us not forget that even as the RBI Deputy Governor, Dr. Patel was a man of few words and was rarely seen giving public interviews or issuing macroeconomic statements.

A lot of media attention and public response to the first year of the RBI governor is likely to be centred round the demonetization drive. While it was an attempt to cleanse the system of black money, it also had some repercussions in the form of disruption for the common man. Perhaps, unfairly, the RBI did receive a lot of flak for the pace of remonetization and the way the entire demonetization exercise was managed. But to judge Dr. Patel’s first year purely on the basis of demonetization would be missing the bigger picture. In fact, there are 3 major contributions of Dr. Urjit Patel in his first year in office…

• Has focused on price stability despite pressure from industry…

One can debate on the merits and demerits of the repo rate cuts by the RBI but it must be said to the credit of Dr. Patel that under him the RBI has made inflation control its primary focus. Over the last 1 year, retail inflation as measured by the CPI index has come down by over 400 basis points. In fact, median inflation has now settled well below the RBI comfort zone of 4%. This has been critical for two reasons. Firstly, it has left the real interest rate attractive enough to encourage portfolio investors into Indian debt. That is apparent from the $52 billion that has flowed in. Secondly, by refraining from aggressive rate cuts, the RBI has ensured that there is no credit binge in the economy which could have adversely impacted inflation.

• There has been major progress on the NPA management front…

While Dr. Rajan set in motion the process of Asset Quality Review (AQR) among banks, Dr. Patel actually took this initiative a few steps forward. Firstly, the RBI has introduced stringent norms for banks with an uncomfortably high level of Gross NPAs. The RBI has implemented restrictions on their lending book, remuneration to top management, dividend policy etc. This has helped to regulate the supply of funds and has ensured that the end-use of funds is closely monitored. Secondly, the RBI has commenced the all-important process of referring the large defaulters to the National Company Law Tribunal (NCLT) where they can be referred to liquidation if there is no resolution within a time limit of 270 days. The RBI has already identified the 12 major defaulters and followed it up with the next list of 40 defaulters. The NPA resolution has surely been taken up on a war footing under the leadership of Dr. Urjit Patel.

• Catalyzed a greater institutionalization of the role of the RBI…

This is a key contribution made by Dr. Patel which may not be too obvious but is important nevertheless. The first MPC meeting was conducted after Dr. Patel took over and through the last 6 MPC meetings, its role in setting rate trajectory has become increasingly fine tuned. The publication of the MPC minutes also gives greater transparency to the entire process. This entire exercise has been largely piloted by Dr. Patel. Secondly, not many would have noticed that the RBI had cut the dividend payable to the government in the fiscal year 2017-18 by more than 50% from Rs.65,876 crore to Rs.30,659 crore. Despite pressure from the bureaucrats and the ministries, Dr. Urjit Patel has made a departure by transferring Rs.13,000 crore during the year to the Contingency Fund. If this mechanism gets institutionalized, this fund could be a back-up in uncertain times. Lastly, the process of demarcating the management of debt from the RBI has also commenced and will go a long way in avoiding conflict of interest for the RBI.

But, there are challenges ahead…

There are likely to be some serious challenges for Dr. Patel in his second year. GDP growth has already fallen to 5.7% and is now a full 100 bps below that of China. Whether aggressive rate cuts will address the issue of growth is still not clear. But there will be increasing pressure on the RBI governor to give his monetary policy contribution towards the revival of growth. But the bigger challenge for Dr. Patel will be on the currency front. The INR has strengthened sharply towards the 64/$ mark. While it has facilitated portfolio inflows, it has also upset the exports applecart. This is the real challenge that Dr. Patel will have to contend with in his second year.

The first year of Dr. Patel can be best captured by the famous quote of the legendary Bob Dylan, “I accept chaos, but I am not sure if chaos accepts me”. Like Bob Dylan, Dr. Urjit Patel has kept an extremely low profile and let his work do the talking. We can surely look forward to an interesting second year!