RBI: Status quo with new governor
The Indian government has voted for status quo, policy continuity and macro-stability with the appointment of a new governor of the Reserve Bank of India (RBI), says the Development Bank of Singapore (DBS).
The government has named RBI deputy governor Urjit Patel to succeed Raghuram Rajan on September 4.
“This is the second instance after the decision to retain the inflation target of 4% (+/-2% range), where the government has demonstrated that inflation will remain a policy priority,” it pointed out.
Dr. Patel was the chief architect of a report on the monetary policy framework in January 2014. Therein he recommended a shift to flexible inflation-targeting, move to a medium-term target of 4% (+/-2% range) within 12-24 months and need to maintain positive real rates, noted DBS in its daily regional market commentary on August 22, 2016.
“Inferring from the tone of this report and his sparing comments since, Dr. Patel will be perceived as being hawkish and allied with outgoing Governor Rajan’s views,” it said.
This implies that under Dr. Patel, the RBI will maintain its cautious stance (much like Governor Rajan’s tenure) particularly in light of the recent firm inflation prints, added the Singapore bank which is already implementing major expansion plans in India.
“It remains to be seen how the new Governor and committee interpret the 2% target band around 4%, where we assume a glide path of 5% this year and 4% thereafter will be preferred,” it believes.
Dr. Patel’s tolerance for any deviation within the band also needs to be known. In few post-policy conferences, he had emphasised on the inherent flexibility in a range target and thereby making fiscal policy an important component in rates management, noted DBS.
“As a base case, we retain our call for a rate cut in 4Q16 but contingent on a sharp disinflation in food prices and CPI moving to or below the 5% mark by then,” said the bank.
Notably, as a Deputy Governor Dr. Patel has only occasionally aired his views in public. With the new appointment, the markets will look for clear and frequent communication on policy and other related issues, believes the bank.
Apart from policy making, the other areas of attention for the new Governor will be the liquidity stance, upcoming FCNR maturities and dealing with the banking sector stress.
On liquidity, there is likely to be continuation of the current stance where the liquidity deficit is being bridged towards neutrality and call rate kept close to the repo rate. fii-news.com
