Two months ago, the head of the Reserve Bank of India, Raghuram Rajan who some had called India's version of Paul Volcker,unexpectedly quit.
As we briefly summarized at the time, when the former IMF chief economist took over the reins of the Reserve Bank of India in September 2013, the rupee was plummeting and inflation was at double-digit levels. Since then he has waged a determined battle against India’s spiralling prices, persuading New Delhi to adopt a formal inflation-targeting framework for its once ad hoc monetary policy. Inflation, nearly 11% in 2013, tumbled to 5.8% last year (helped by plunging oil prices), with the central bank succeeding in not only stabilizing the rupee and the local stock market, but making India the world's fastest growing major economy, overtaking China.
However, his success had also planted the seeds of his own destruction: many Indian businessmen were are frustrated that interest rates have not fallen faster. Some tycoons were unhappy with growing pressure to repay their overleveraged companies’ debts to ailing state banks, despite tough economic times. He was also criticized by some politicians for being too outspoken and not doing enough to boost economic growth in Asia’s third-largest economy.
And so, as a result of rising political and business pressure (although he would never admit to it), Rajan stepped down, prompting the question who would replace him, especially since Rajan was popular with most international investors and many say they will be watching closely to see if his successor continues to resist pressures from New Delhi.
We got the answer earlier today, when India appointed Urjit Patel as the country’s next central bank chief.
And no, he is not currently employed by Goldman Sachs.
A quick look at Patel's background:
After obtaining his PhD, Dr. Patel joined the International Monetary Fund in 1990 worked on the USA, India, Bahamas and Myanmar desks at IMF till 1995. Thereafter he went on deputation the IMF to the Reserve Bank of India, where he played an advisory role in the development of the debt market, banking sector reforms, pension fund reforms, targeting of real exchange rate. After the two-year deputation with RBI, Patel became a Consultant to the Government of India in the Ministry of Finance, Department of Economic Affairs - a position he held from 1998 to 2001.Between 2000 and 2004, Dr. Patel worked with several High Level Committees at both Central and State Government level, including Competition Commission, Task Force on Direct Taxes, Prime Minister’s Task Force on Infrastructure, Group of Ministers on Telecom Matters, Advisory Committee on Research Projects and Market Studies, Committee on Civil Aviation Reforms, Expert Group on State Electricity Boards and High Level Expert Group on Civil & Defence Services Pension System.On 11 January 2013, Urjit Patel was appointed as Deputy Governor of RBI for a period of three years. He took over charge of the vital Monetary Policy Department, succeeding Subir Gokarn to the post.
Rajan, who is widely credited with helping arrest the rupee’s decline against the dollar and bringing down the country’s inflation rate, wasn't invited to serve a second term. Mr. Rajan, who took over at the helm of the RBI in 2013, was criticized by some politicians and business leaders for being too outspoken and not doing enough to boost economic growth in Asia’s third-largest economy.
According to one commentator, by picking Patel, India has played it safe: "similar IMF background, quieter version of Rajan."
Patel takes over at the RBI as it undergoes a structural overhaul and begins to unload bad loans on its banks’ balance sheets, the WSJ adds.
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. India’s industrial production is weak and exports have been falling for most of the past two years. India’s small companies say loans are still too expensive despite Rajan’s five rate cuts and that the prices they charge for their products are barely growing. They say Rajan’s lending rate reductions, which took India’s benchmark rate to its lowest level in five years, haven't been enough. Many in Mr. Modi’s Bharatiya Janata Party agree.
In other words, Rajan's replacement will be pressured to cut rates even more. However, he may have trouble, as rising prices are also something the new governor will have to address.
The new RBI governor is less likely to get inflation fighting assistance from falling commodity prices. India’s Consumer Price Index rose 6.07% in July, gaining more than 1 percentage point since March and crossing the upward limit of the RBI’s target inflation rate.
Then again, Patel will no longer be the sole decision-maker. The new governor will also have the added restriction of having to share his decision-making power for the first time with a monetary policy committee, which will include three members appointed by the government, a move many have said was designed to crippled the central bank's independence. The introduction of the committee is a radical departure as the entire onus of rate decisions used to rest with the governor. While the RBI head will still have the deciding vote if there is a tie, his decision-making power has been decidedly diluted.
To be sure, the government’s dominant role in appointing the committee’s members could hurt the central bank’s autonomy, some analysts worry. “Am I concerned about the RBI’s independence? The answer is: ‘yes,’” said Ritika Mankar, senior economist at Ambit, a Mumbai-based brokerage, told the WSJ.
In terms of next steps, the first test for the new governor will come in September, when nonresident Indians start to redeem more than $20 billion in foreign-currency bonds Mr. Rajan encouraged banks to issue soon after his appointment 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 predicts that only $5 billion will be rolled over.
Another problem for the new governor will be one very familiar to European banks: a surge in non-performing loans, as the new central bank chief inherits the mountain of bad debt at 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% this March.
The RBI’s deadline for banks to clean up their balance sheets by March 2017 is fast approaching, and the remaining nonperforming assets are expected to continue to sap the banks’ lending capacity. Banks’ inability and unwillingness to lend more is keeping the benefits of multiple rate cuts from trickling down into the economy and in turn is hurting economic expansion prospects.
But ultimately, just like everywhere else, only one thing matters: the reaction of the local stock market market which will be revealed on Monday. With both the Sensex and the Nifty just shy of all time highs, we are confident Rajan's replacement will provide just the needed "confidence" to send stocks over the hump.
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