Urjit Patel has assumed charge of Reserve Bank of India at a time when

the Indian economy is in a much better position than what his

predecessor Raghuram Rajan inherited three years ago.
Being governor of the central bank of the third largest economy (in size
measured by purchasing power parity) is itself quite a formidable
responsibility. In addition, Dr. Patel is also filling in the shoes of Dr.
Raghuram Rajan whose tenure has been absolutely impressive.
Firstly, there is Rajans inflation fighting record. Average inflation in the
five years prior to Rajan was about 10.4%. This came down to an
average of 6.6% in the past three-year period.
Secondly, the exchange rate stabilized, with the rupee down only
moderately in the past three years, as compared to the panic fall prior to
August 2013. Even the volatility in the exchange rate movement has
become subdued.
Thirdly, the benchmark interest rate, as measured by the yield on tenyear government bond. has come down sharply, being close to 7% now.
Fourthly, under Rajan there was an extensive asset quality review of
balance sheets of all banks. This was to get a more accurate and
transparent picture of the bad loans situation. No doubt this revealed
large amount of stressed assets (loans) of banks, but it also led to relief
that much of the bad news is behind us.

UPCOMING CHALLENGES FOR URJIT PATEL

New Monetary Policy Framework:

The first among many challenges that the new Governor will face will be
the changed circumstances of monetary policy formulation.
A soon-to-be-appointed monetary policy committee will decide on the
monetary policy, in one of the biggest overhauls in the Reserve Bank's
history. The government will appoint three nominees on the 6-member
committee while the rest of the committee members will be from RBI,
including the governor. Though Dr Patel will have the casting vote in case
of a tie, his powers in setting the monetary policy will get considerably
reduced. In the earlier regime, the RBI chief was the sole decision maker

on the monetary policy. Incidentally, it was Dr Patel, who as deputy

governor scripted this new framework for fighting price rise.

Bad loan clean-up:

Patel also inherits the ongoing clean-up of bank balance sheets.
Unclogging the credit pipeline by helping resolve the build-up of stressed
assets with the countrys lenders and thereby improving monetary
transmission. Public sector banks gross bad debt neared Rs 6 lakh crore
at the end of fiscal 2015-16 as banks reported heavy bad debts under
RBIs asset quality review. The challenge that remains now is how the
central bank will go about with the resolution process as RBIs previous
schemes have not been very effective.

Bank recapitalisation:
The government in July had announced the first round of capital infusion
of Rs. 22,915 crore in 13 public sector banks as part of its four-year Rs.
75,000 crore bank recapitalisation programme. But the capital
requirement of state-run banks is much higher. The credit profiles of
state-run banks are under pressure following huge losses over the past
few quarters, says international ratings agency Fitch. The rating agency
estimates that Indian banks will need $90 billion in total additional
capital, most of which will be accounted for by the public sector banks to
meet Basel III requirements by 2019. The most important thing at the
moment is to increase the capital availability to the banks. The
government is doing to some extent but much more needs to be done.
The credit flow to the industry should not decline. The former Reliance
Industries executive (Urjit Patel) will also need to work closely with
bankers - a relationship that frayed at times under Rajan due to tensions
over banks' reluctance to pass on the RBI's hefty rate cuts and a push to
clean up $120 billion in bad loans in the banking system by March 2017.

Inflation:
Patel and the panel will be responsible for ensuring inflation stays within
a target of 4 percent with a range of two percentage points on either
side, effectively creating a target range of 2 to 6 percent. Inflation has
started inching up, led by food prices even as global commodity prices,
particularly that of oil has started ticking up. July, 2016 CPI rose to 6.07

per cent, much higher than RBIs comfort zone of 5 per cent and
seriously jeopardise RBIs efforts in containing long term inflation at 4
per cent, as per the monetary policy frameworks inflation targeting
model.

Rupee stability
The Reserve Bank of India (RBI) raised about $35 billion through these
deposits in September-November,2013. Most of the deposits are getting
due this year and the central bank has guided that the resultant dollar
outflow (about $20 billion) could create temporary liquidity crisis in the
market. Outgoing governor Raghuram Rajan though, has guided that it
should not be a challenge if managed well. Nevertheless, for the new
governor, FCNR (B) deposits remain a daunting challenge that could
destabilise the domestic exchange rate and push rupee towards record
lows.
The government has already taken the first step by announcing that the
associated banks of State Bank of India will be merged with the parent. It
also wants to privatise IDBI Bank as a precursor to larger consolidation
move in the Indian banking industry. The new governor will have to
oversee the consolidation.

None of these challenges are new, nor is the incoming central banker
new to the task. Beyond these, there are the myriad daily issues to solve
and hurdles to surmount. But the RBI, at 80 years of age, is older than
the republic, and is a repository of solid trust and spotless reputation. To
protect, strengthen and solidify that trust and reputation is perhaps the
single and most important charge of the Governor