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. But the pressure to lower interest rates amid an upsurge in inflation and the clean-up of banks’ balance sheets are some of the formidable challenges for the new RBI chief.
Here are some key challenges that Urjit Patel faces at RBI:
Bad loan Clean-Up: Dr Patel faces the ‘unfinished agenda’ of his predecessor on completing ‘deep surgery’ of banks’ bad loans. Raghuram Rajan had ordered ‘deep surgery’ to cleanse the balance sheets of the banks from bad loans by March 2017 as part of the RBI’s asset review process. Indian banking sector is saddled with $120 billion (nearly Rs 8 lakh crore) of sour loans, which is constraining new lending and corporate investments at a time when the GDP growth has slowed down. Festering bad loans, which have made banks wary of fresh lending, have only worsened the investment crisis.
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,” says former RBI chief Bimal Jalan.
New Monetary Policy Framework: 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. The government has tasked the monetary policy committee of keeping inflation in the 4 per cent range for next five years.
Rupee Stability: One of the immediate tasks of Dr Patel would be to prevent the volatility in the wake of an estimated $26 billion NRI deposits maturing from this month. The RBI estimates $20 billion leaving the country over the next few months. This will happen at a time when there is a possibility of the US Federal Reserve hiking rates later this year. Banks had raised these NRI deposits in 2013 to shore up the rupee which was struggling at record lows. Despite a lot of volatility in global financial markets, Raghuram Rajan has left behind a stable rupee, which has been one of the best performing emerging market currencies in the past three years.
Rate Cuts: A slowdown in the GDP growth in the June quarter is likely to increase pressure on Dr Patel to further cut rates to boost the economy. The economic growth slowed to a 15-month low of 7.1 per cent in April-June, well below the 8 per cent needed to create millions of new jobs. Dr Rajan had cut the policy repo rate by 150 basis points since the start of 2015, but has held off on easing further since April as inflation picked up. Consumer prices rose 6.07 per cent in July from a year ago, which is above the RBI’s target. In the near term, economists see little room for Dr Patel to cut rates. Dr Patel will thus need to nudge banks to pass on RBI’s past rate cuts, say economists.