Rare Indian Shares ( by Ashwani K Aggarwal ): A comparison of India’s economy when Raghuram Rajan took charge at the RBI and now as Urjit Patel steps in

September 07, 2016

A comparison of India’s economy when Raghuram Rajan took charge at the RBI and now as Urjit Patel steps in

Urjit Patel officially took charge as the governor of the Reserve Bank of India (RBI) on Sept. 04. Patel, who succeeds Raghuram Rajan, comes in at a time when India is working to solve the sticky problem of inflation and its banks are battling massive non-performing assets.

While comparisons will be drawn between Rajan and Patel, the economic environments that these economists took charge under are pretty different. The biggest challenge Rajan faced in 2013 was retail inflation. He curbed it by hiking interest rates—the most common tool used by central banks in such situations. Patel, on the other hand, must maintain inflation at the current stabilised level.

Rajan’s war on banks’ non-performing assets (NPAs) is half-won. Meanwhile, India’s currency has also seen many ups and downs in the last few years.

So, in many ways, the challenges that Patel faces are different from those that Rajan faced. Here are the major economic indicators that varied when Rajan and Patel took over:

Interest rates

Currently, the repo rate—at which the RBI lends to commercial banks—in India is the lowest in six years. When Rajan took over, he had to increase rates to keep the double-digit inflation of that time under check.

Patel has been called a “hawk” when it comes to interest rates and inflation. A hawkish stance is when someone is in favour of high interest rates to control inflation. Considering the current low repo rate, there’s enough room for the new governor to hike it in future.

Inflation

Retail inflation—or consumer price inflation—was around 10% in 2013. Today, it is around 6% and, with the RBI and government’s official target in place, it may not easily inch up. But then, there are factors such as deficient monsoons that are beyond anyone’s control. In its policy reviews, the RBI has repeatedly warned that bad monsoons could drive food inflation higher.

Bad loans

India’s banks are facing the huge task of cleaning up their books of toxic assets. Rajan began the process, and Patel needs to take it forward. When Rajan took charge, gross NPAs at the country’s scheduled commercial banks were half of what they are today, but steadily increasing. Additionally, there are still a lot of loans that aren’t yet classified as NPAs.