“Urjit is his own man,” former Reserve Bank of India (RBI) Governor Raghuram Rajan once said of his successor. Dr. Rajan had entrusted Urjit Patel, who was a Deputy Governor then, with the task of devising a framework to make the monetary policy a lot more transparent and modern.
While Dr. Rajan impressed everyone from the word go, things were different for Dr. Patel. Within two months of his taking charge as the 24th Governor of the RBI in September, the government stumped everyone by announcing the withdrawal of the Rs. 500 and Rs. 1,000 notes. It was an exercise where the decision was taken in New Delhi but its implementation fell on mandarins at Mint Road – where the RBI’s Mumbai headquarters is located. It was a mammoth exercise – as more than 86% of the total currency in circulation was rendered invalid at one go.
Dr. Patel drew flak from all quarters over the poor implementation of the entire demonetisation exercise. Also, Dr. Patel came under intense criticism for his perceived silence.
Former Finance Minister P. Chidambaram said at the time that Dr. Patel had failed to handle the demonetisation exercise well. He had opined that the Governor of RBI did not handle the issue as an independent autonomous institution ought to have.
During the first 50 days of the demonetisation drive, it was fairly routine for the finance ministry officials to brief reporters on the upcoming norms in the morning, circulars for which were subsequently issued by the RBI late in the evening.
In January, the association representing employees and officers of the RBI wrote to Dr. Patel urging him to uphold the central bank’s autonomy amid allegations that the government was undermining it. Former central bankers also joined the chorus. Y.V. Reddy, who headed the RBI between 2003 and 2008 and had since largely avoided any public comment on the central bank’s affairs, told a private television channel that he would have resigned had he been overruled and asked to implement demonetisation against his advice.
At stake was the central bank’s pride of being an independent and autonomous institution. Dr. Patel, appears to have opted to use the February bimonthly monetary policy review as the opportunity to set the record straight.
This the RBI did, surprising most market participants, by changing the rate action narrative for good by explicitly stating that monetary policy no longer remained ‘accommodative’ and that the stance had now become ‘neutral’. This means the RBI is now open to raising interest rates.
With retail inflation slowing to its lowest level in more than two years and the Finance Minister ’s Budget resolve to maintain fiscal discipline, many saw a rate cut as a done deal. However, Dr. Patel and other members of the Monetary Policy Committee thought otherwise.
The bond market reacted with the yield on the 10-year benchmark sovereign paper shooting up 32 basis points after the policy was announced and the narrative changed. (100 basis points make 1 percentage point.)
“We expect January inflation to mark the trough,” Sonal Verma, research analyst with Nomura, wrote in a report. The RBI is clearly looking beyond just the short-term inflation trajectory and taking into account what could happen 6-8 months down the road.
Dr. Patel also acted to silence criticism over the charge of lack of planning on the part of RBI. With remonetisation well under way, RBI gave specific timelines in advance as to when the cash withdrawal limits would be eased and when they would be completely lifted.