Dr. Urjit Patel has been appointed the new RBI Governor. His appointment should be perceived as a continuity of monetary policy approach as Dr. Patel has been the RBI deputy governor under Dr. Rajan and key author of the Urjit Patel Committee report (on which India’s flexible inflation targeting monetary policy framework is based). Dr. Patel, an economist from Yale University, has served at IMF and in various corporate & government roles in his professional life. Over the next few weeks, the government will also constitute the Monetary Policy Committee (MPC) wherein policy decisions will be taken based on the committee’s majority view.
Once the MPC is set up, one needs to monitor 2 things. First, how the MPC reads the CPI mandate of 2-6% range and will there be any change in the glide path to 4% target by January 2018. Second, the committee’s stance on the 1.5-2.0% real rates objective which the central bank has been following over the past 3 years. Both these will be crucial in assessing the future scope of monetary easing. For now, we continue to maintain our expectation of another 50bps easing in balance FY17.
Dr. Urjit Patel: Brief profile
Current position: RBI deputy governor in charge of monetary policy since January 2013.
Educational background: PhD from Yale University and M.Phil from Oxford University.
Key beliefs on economic policy: Author of the Monetary Policy report which recommended flexible inflation targeting policy with headline CPI of 4 +/-2% as target. He has been a strong proponent of continued fiscal consolidation. Monetary policy stance is likely to be a continuation of the current one.
Past professional experience: Worked at IMF from 1990-1995. From 1995-2004, he has worked with RBI and Government of India in various high level committees. From 2004-13, he has served various corporates such as Advisor, Boston Consulting Group, IDFC, Reliance, etc. Deputy Governor since January 2013.
Key things to monitor going ahead
Monetary Policy Committee: A committee of 6 members will be set up to take policy decisions based on majority. The governor will carry the decisive vote in case of a tie.
Change in CPI glide path of 4% target by January 2018: RBI’s current policy targets CPI inflation of 4% by January 2018. One would need to monitor MPC’s stance on the same and how it reads the 2-6% CPI target.
Real interest rates: Over, the past 3 years RBI has tried to maintain 1.5-2% real interest rates. One needs to see if this will be continued or will there be some relaxation.
