Urjit Patel Will Carry Forward Inflation Fight, Says Raghuram Rajan

Reserve Bank of India (RBI) governor Raghuram Rajan welcomed on Friday (26 August) the appointment of Urjit Patel as his successor, calling him a close ally and saying it would ensure continuity in meeting the country's inflation objectives.

Patel, currently a deputy governor at the RBI, was named by the government this month to replace Rajan at the helm of the central bank on September 4.

The future RBI governor is widely seen as closely aligned to Rajan, who was hailed by investors for cutting inflation in half during his three-year tenure after introducing a target that aims to keep consumer prices rising at 2-6 per cent.

Patel, who prefers a lower profile, headed the committee that unveiled that target and is one of the architects of the creation of a yet-to-be-named six-member monetary policy committee that will set interest rates.

"I am confident that Dr Urjit Patel, who has worked closely with me on monetary policy for the last three years, will ably guide the Monetary Policy Committee going forward in achieving our inflation objectives," Rajan said Rajan said at a FEDAI (Forex Dealers Association of India) event in Mumbai.

These are the first comments by Rajan since Patel's was named last Saturday by the government, a decision welcomed as ensuring continuity in the central bank's policies.

Rajan added he had "no doubt that inflation will fall in the months ahead", after consumer prices rose 6.07 per cent in July. That is above the RBI's inflation target and also above his personal aim to bring down inflation to around 5 per cent by March 2017.

"Yes, July's inflation reading was a high 6.07 per cent, but I have no doubt that inflation will fall in the months ahead," he said.

Speaking in the context of strengthening debt markets, Rajan said participants now know that the soon-to-be-formed Monetary Policy Committee (MPC) will have to maintain low and stable inflation over the next five years and will do "what it takes" to meet the objectives.

"This lowers the inflation risk premium, and thus reduces the nominal fixed interest rate for everyone, from the government to the riskiest borrower," Rajan said.

As per a government notification, RBI is required to get headline inflation down to 4 per cent by March 2018, with a two percentage point leeway on either side.

The RBI will next hold its policy review on October 4 in what would mark Patel's debut, though the government has not said whether a monetary policy committee - to be made up of three officials named by New Delhi and three RBI representatives - will be established by then.

In the speech, Rajan focused on the market reforms the RBI has unveiled since he joined in 2013, when India was mired in its worst currency crisis in more than two decades.

He acknowledged the RBI had proceeded cautiously, saying his priority had been to navigate India through a period of great market turmoil.

Rajan reiterated his caution about issuing a dollar-denominated bond abroad for the first time, given the "currency risk" involved, while also expressing misgivings about allowing rupee-denominated securities to trade abroad.

But he strongly endorsed the raft of reforms unveiled by India's central bank on Thursday to deepen the country's corporate bond markets as being the right form of slower developments.

"Observers may be impatient, but my belief is that steady and irreversible reform and 'mini bangs' like yesterday’s rather than 'Big Bang' is the need of the hour. As global conditions become less uncertain, the pace of reform can pick up."

In a rare intervention, Patel had refused to get bracketed either as a hawk or a dove, and used the same ornithology-inspired analogy to compare it with an owl, which is always watchful.

(Agencies)