RBI fights inflation and corruption
The reserve bank of India has two crucial jobs: deciding monetary policy and regulating the banking system. Urjit Patel, governor of the central bank, has managed both expertly this year.
When Patel took over the RBI in September 2016 the contrast with his predecessor, Raghuram Rajan, was stark. Rajan, referred to as a “rock star” by some parts of the Indian media, was flamboyant. Patel was quieter, appearing a man better suited to analysis than action. In office, he has challenged that assumption.
First, he has not hesitated to raise interest rates. The RBI is fighting rising inflation in the country after consumer prices rose above the central bank’s 4% target (a target that, incidentally, was suggested by Patel when he was deputy governor). The central bank has hiked rates twice this year, by 25bp each time in June and August.
It seems likely that Patel will need one or two more rate hikes to tame inflation but his rapid action earlier this year shows he is the man for the job. In a September speech, he quoted ancient scribe Publilius Syrus: “He is most free from danger who, even when safe, is on his guard.” Investors should have little doubt that Patel will be on guard against inflation.
Patel has also impressed GlobalMarkets with his dogged determination to clean up the banking system. Indian banks were marred by controversy last year when Bank of Baroda got caught up in a scandal surrounding South Africa’s Gupta family. But the greater risk to the system was hazy rules around the recognition of non-performing loans.
The RBI has moved to address this. In February, the central bank-cum-regulator forced banks to hold more capital against non-performing loans, unveiling a set of new rules concerning how banks should recognise non-performing loans as well as increasing the capital they need to hold against them.
Patel, despite his reputation for quiet reflection, has also rather loudly defended the interests of emerging market economies. In an opinion piece for The Financial Times he urged the Federal Reserve to slow its balance sheet reduction, pointing to the “double whammy” of reduced liquidity from the US central bank’s asset runoffs and the increased issuance of Treasuries to fund tax cuts.
In this sense, he ticks three important boxes: active monetary policy, prudent banking reforms and a new found willingness to use his voice on the global stage. There is little more a central banker could do to deserve this award.