The latest change in India's central bank promises more of the same. On Sept. 4, outgoing Reserve Bank of India (RBI) Gov. Raghuram Rajan ceded his position to Urjit Patel, the institution's current deputy governor. Patel's appointment ended months of speculation over who would replace Rajan, an internationally respected academic who jolted the foreign investment community when he announced his intention to step down at the end of his three-year term. Rajan was seen as a stabilizing force in Indian monetary policy. Foreign investors found his steady hand and sterling credentials — a doctorate from the Massachussetts Institute of Technology and a stint as the International Monetary Fund's chief economist — reassuring. News of Rajan's departure fueled concerns over the future policy course of one of the world's largest emerging market economies, and Patel's appointment is meant to assuage those anxieties. Much as the RBI's new leader will continue many of his predecessor's policies, he will also face many of the same difficulties.
In terms of policy, Patel shares much with Rajan. Both men, for instance, take a tough stance on inflation. In fact, on joining the RBI in 2013, Patel authored a report advocating Rajan's proposed framework for reining in runaway prices. (For an economy such as India's, which is struggling to push past its $1,400 per capita gross domestic product plateau even as it is hailed as the world's fastest-growing economy, keeping a lid on inflation is a perennial priority.) Yet in terms of personality, Patel differs starkly from his predecessor. Rajan frequently commented on social policy issues, including India's religious intolerance debate, traditionally outside the purview of a central bank governor. His progressive positions were often at odds with those of Prime Minister Narendra Modi's center-right Bharatiya Janata Party. By contrast, Patel is described as understated, a trait that likely influenced Modi's decision to appoint him.
The Politics of Banking
Along with the differences in their comportment, the similarities between Patel and Rajan's policy suggest that politics played a decisive role in the shake-up at the RBI. Throughout his tenure, Rajan faced criticisms from members of the ruling party based more on politics than on policy. For instance, Subramanian Swamy, a senior Bharatiya Janata lawmaker, condemned Rajan for refusing to lower interest rates, though Patel, whom he supports, shares his predecessor's stance on the matter. Swamy also questioned the former RBI governor's loyalty to India in light of his ties to the United States (Rajan is on leave from his professorial post at the University of Chicago). Yet he had no such qualms about Patel, who was born in Kenya. Indeed, Swamy likely objected to Rajan on the grounds that he, unlike his successor, was appointed by the center-left Indian National Congress Party.
Even so, Patel's selection was not a purely political move. Modi opted for the policy continuity that Patel represents with an eye to foreign direct investment, recognizing that a central bank governor can affect how investors view a country. In 2015, Rajan's second year at the helm of the RBI, India attracted a record $44 billion in foreign direct investment. Modi probably hopes that Patel will continue this trend.
Notwithstanding his success with investors, Rajan leaves his successor with some pressing challenges. The latest government data reveals that the Indian economy grew by 7.1 percent from April to June — its slowest rate in five quarters. A slowdown in the mining, construction and agriculture sectors helps explain the lag; the services sector responsible for more than 50 percent of India's GDP grew at a healthy 9.6 percent rate during the same period. Since the structural changes, such as land and labor reform, needed to boost India's economic growth are unlikely to pass this year, Modi is entertaining a solution that many other world leaders have tried: monetary policy. But using quantitative easing to stimulate growth could compound India's inflation problem. Inflation rose to 6.07 percent in July, just above the RBI's 6 percent upper limit, and Patel will be reluctant to risk driving that number any higher by raising interest rates.
A Lasting Legacy
Still, in reckoning with India's economic challenges, Patel will at least enjoy greater insulation from government pressure than Rajan did, thanks to the advent of the new six-member Monetary Policy Committee (a legacy of Rajan). The committee will be in charge of setting the key interest rate, a responsibility that fell squarely to Rajan during his tenure as the RBI's governor. Because central banks focus on price stability — which requires a long-term approach — they are granted autonomy from the government and from the often-disruptive cyclical pressures of politics. But Rajan found that autonomy is a relative term, one that he and Modi understood differently. To counter the government's attempts to dictate interest rates, Rajan instituted the Monetary Policy Committee, reasoning that six people will be less susceptible to the administration's influence than one. New Delhi, meanwhile, will still have its say: The government and the RBI each appoint half of the committee's members (though the governor has the deciding vote).
Despite the problems he faces, India's new central bank governor is prepared for the job. After all, Patel helped turn the RBI's focus toward inflation. And although Patel can expect greater latitude in his policymaking than his predecessor had, he will not be entirely free from the pressures of politics. Modi will count on him to stabilize prices and maximize employment in the interests of maintaining his own position.
