After a long and hectic effort, government has selected a successor for the outgoing governor of the RBI- Raghram Rajan. Mr Urjit Patel the new Governor and one of the Deputy Governors of the RBI will lead the central bank for the next three years.

Nowhere in recent history, the RBI governor was selected after intense political and administrative consultations. An even more interesting outcome of his selection is the procedure constructed for his appointment.

According to the Cabinet Committee, “”The appointment has been made based on the recommendation of the Financial Sector Regulatory Appointments Search Committee (FSRASC), headed by the Cabinet Secretary.”

The Rebellion against Raghuram Rajan was led by the bureaucracy who were not able to bear a non-servant possessing the coveted post though Indian bureaucracy represents power without skill. Formation of the FSRAASC shows that grievances of the babus are addressed.

Whatever may be related issues, the government has selected the best person among the list. Patel is as good as Rakesh Mohan or Subir Gokarn.

Urjit Patel has a less charismatic and professional track record compared to Rajan’s, At the same time, he was also groomed like Rajan. He worked at the IMF and was an economist at Boston Consultants Group. But Patel doesn’t have the academic reach of Rajan as the latter was the faculty at the renowned Chicago University.

A part of the controversy about Rajan was that he was not trained as a true government servant.  He often spoke openly – something unusual for babus. In this context, the new governor’s qualification might have gone through sharp scrutiny.

Here, Patel has a balanced profile as he already is a Deputy Governor of the RBI and at the same time has the professional experience of a new age central banker. Understandably he might be a safe choice to console all those in the beurocratic and political circle who doesn’t like a rock star Governor.

He is well trained inside the government machinery and may not steal the public attention away from his masters.

Urjit Patel has a tag as the central banker – that he is the architect of the present inflation targeting monetary policy framework in India.

Rajan or Patel, inflation targeting is the ultimate destination for a monetarist central banker, Here, Patel is near to Rajan’s views especially on monetary policy front and both have the same voice.

But it is always difficult to be a successor for one of the most successful central banker. Here comes Patel’s problems; any externality like an external shock penetrating into the economy and a weak currency may be interpreted as his failure.  

Inflation targeting and MPC will reduce the governors’ power

For the first time, the RBI governor has to work within the limit set by two lines –inflation targeting and the Monetary Policy Committee.

Inflation targeting sets the upper and lower limits for inflation that the Governor can afford with. If it goes beyond this limit for a time period set by the government, the Governor should make a report to the former.  

Here, the job of the Governor is cut short; he has his limit upfront. No extraordinary duty at all and this means no discretionary powers regarding the interest rate policy.

So under this new framework, the Governor doesn’t matter opposite to the old format.

It is not the inflation targeting alone that makes the Governor’s work less relevant; but also the newly constituted Monetary Policy Committee. The power to decide interest rate is equally divided among six members and the governor is just one among them. MPC takes decisions about the policy rate (repo rate) and in the committee, the government and the RBI shares power equally with three members each.

The voting power of the Governor is the same as that of the government appointed secretary. Consolation is that Governor possess an irrelevant casting vote in the six-member committee.

The test for the new Governor is the way in which he may handle a quick and unanticipated shock in the economy. Here, the Governor’s sophistication and thinking will be tested and it is in this area that Rrajan excels compared to the rest. Hope Patel can match Rajan here.

Anyway, best wishes to Urjit Patel to lead one of the fastest growing economies of the world.

*********