This should be Urjit Patel's agenda as RBI Governor: Experts

Dr Urjit Patel took over as the 24th Governor of the Reserve Bank on Sunday. On the occasion of handing over charge, outgoing Governor Raghuram Rajan had an interesting parting gift for his successor — a memento bearing the Indian rupee with the words 'Hamari Zimmedari' (our responsibility) inscribed on it.Renowned economist TN Srinivasan, also Professor Emeritus-Economics at Yale University and mentor to Dr Patel, said that the new governor should continue his predecessor's inflation fight while also balancing it with growth. The central bank's independence should also be high on his priority. "RBI governor should have the freedom to say a 'no' if the fiscal authority tries to push the economy in an inappropriate direction," he told CNBC-TV18.Along with Srinivasan, Standard Chartered Head - Treasury Ananth Narayan, JP Morgan Economist Jahangir Aziz and Edelweiss Chairman and CEO Rashesh Shah talked about their expectations from the incumbent's stint as central bank chief and outlined areas he should focus on.Below is the transcript of the discussion with CNBC-TV18\\'s Latha Venkatesh.Q: Now we have a new governor Urjit Patel, what do you think should be his foremost, the first three things on his agenda?Srinivasan: One of the major things that the governor has to address is keeping the inflation under control. Under control means it has to be at a level which is appropriate from the perspective of consumers of this economy and it has to be appropriate to give adequate incentives for the producers of the economy to generate the growth that the economy desires. So, there is a balancing task which is hard and we have not always been successful over the decades of our history in balancing the two.However since the last governors reign we have managed to bring the inflation down from what it was in double digits to a level that is appropriate and it is on a glide path towards an even lower inflation rate. So, from the perspective of inflation we might say as of now even though there are some signs of pickup in inflation, nonetheless it looks as if stabilising inflation has been successful.However on the other hand about growth, it is unclear whether we are on a path that would be appropriate given the hoopla about India being the fastest growing economy in the world, whether our realities, fundamentals of the growth process are where they should be were India to be the fastest growing economy in a sustainable fashion for next several years to come?So, I have some concerns on the real side of the economy namely on the growth side of the economy. However the new governor is quite aware of what the situation is and I am confident that he would be addressing this issue very seriously.One other issue that I might flag is an issue that was highlighted by the outgoing governor, namely the independence of Reserve Bank of India (RBI). For decades or so the RBI governor who took his directives from the finance ministry, so any fiscal deficit the finance minister chose, the RBI governor dutifully provided the liquidity to cover that deficit. Fortunately that situation had changed when YV Reddy was the governor of the RBI, first time the governor and the finance ministry and the RBI came to an agreement about the extent of financing that the RBI would do. Now that is only one part of it but the RBI governor should have the freedom to say no if the fiscal authority tries to push the economy in a direction which the governor thinks is not appropriate. That requires independence, not only independence to use whatever instruments that the governor thinks are appropriate for controlling the situation, whatever situation that might be emerging but also to say to the finance minister that this particular proposal that you are making is not appropriate. That is to say no, is an important aspect of a efficient and able governor of RBI and that he cannot do unless he doesn't have independence._PAGEBREAK_Q: But second part of the agenda really will be here and now in terms of navigating the outflow of USD 26 billion of Foreign Currency Non-Resident (Bank)’ Account FCNR (B) deposits and thereafter continuing to provide liquidity. What’s your sense, what should be on the governor’s agenda?Narayan: Lots of thing and I guess we all look forward to parsing everything he says or doesn’t say to figure out his outlook, but straightaway first of all his monetary policy, while clearly that part should be continuity from where Dr Rajan let off. The reality is there always are nuances, there always are interpretations to monetary policy frameworks, so is he going to take a short term view. We all know consumer price index (CPI) is probably going to come down, maybe to the low 4 percent handle by November. Thereafter, probably it will head up again. Now does he look at the first part and afford a few more accommodative policy cuts or does he look at the longer term for the next year and say hang on, I still don’t see inflation coming down to 4 percent by 2018 March and therefore hold off.I think those nuances we will be looking very, very closely to see what his interpretation is. The second part is a whole host of structural issues that was on Dr Rajan’s agenda and played and frankly where we don’t know what Dr Patel’s viewpoints are things like the health of the banking sector. How much of a role does he play there, how active he is in that and does he also step into try and provide some solutions to the possible capital hold that might be there in public sector banks, things like liquidity and transmission which were a lot of discussion around that, what his take on the conundrum of transmission and does he foresee any requirement for tweaking to ensure transmissions comes through.Other things like Fiscal Responsibility and Budget Management (FRBM) etc, which will be again centre of the plate as far as policy matters are concerned. All these myriad issues corporate bond easing and opening up of markets not relating directly to monetary policy be very interesting to see what Dr Patel’s viewpoint is. The last but definitely not the least, the world is a crazy place even now with extraordinary low rates, market still seems vulnerable to shocks, while things like Brexit have come and gone without being really as much of problem as we thought it could be. We don’t know what we don’t know, will China be a problem again, will commodities be a problem again, will US elections be a problem again, while India still looking reasonably strong in the overall global ferment. I think Dr Patel has to be extremely cautious about what’s happening globally and how that could rub off into India.Q: What do you think should be the governor\\'s agenda only on the issue of inflation control? After all Raghuram Rajan has handed over a memento saying our responsibility - the value of the rupee. So, that should be the continuing baton from governor to governor. Do you think it is time the new governor shifted his gaze from January 2017 5 percent to January 2018 4 percent? Should that be immediately on his agenda or should he give growth a more important weight and wait for the 4 percent, probably be flexible about it in terms of time?Aziz: Urjit Patel was one if the architect of inflation targeting framework and if you look at that framework it clearly says that they have a forward looking view which brings into play the 4 percent rather than the 5 percent.The second part argument would be that it depends on what Urjit Patel thinks is actual trade off between inflation and growth, most of us would believe that there isn’t really any actual trade off between growth and inflation. We have tries that recipe in 2009, 2010, 2011 with disastrous results.We have enormous amount of academic work produced by RBI staff that suggests that unless inflation falls below 4 percent or even lower, there isn’t really a trade off between inflation and growth. So, that is a false trade off that we have been using to justify policies. I think will be interesting to see what Urjit Patel\\'s own views are on this.My sense is that he will probably be one of the people who will say that there isn’t really that trade off which we think exists._PAGEBREAK_Q: You want him to shift his gaze to 4 percent target?Aziz: Absolutely. If you are going to do inflation targeting, it has to be forward looking, it has to be 12-18 months and that brings 4 percent into play immediately. I think his views on the rupee would be important. If you look at the last I would say 18 months, the rupee more or less has been kept in a very close band. The question is does he move towards greater flexibility on the rupee. Flexibility could be both ways or it could be one sided, it depends upon how the RBI sees the importance of rupee both in terms of inflation as well as in terms of exports. So, I would be interested to seeing how he views the rupee. Lastly I would say what does he actually do to the proposals that Raghuram Rajan made on corporate bonds.Q: Two specific points, we can all draw up a huge agenda for the governor because the full service central bank like India does have a lot of responsibility, but I want your views on two issues from a market angle do you think the agenda on new governor’s plate should be more skewed towards growth given the condition we are in and secondly what would you expect as someone who has seen a lot of small banks do very well. Do you think over there the governor should expand and say that on tap licences not just for full service banks, universal banks, but also for small banks and payment banks?Shah: I think this whole argument of should the governor focus on growth or on an inflation control is an evergreen one. I think it is going to go on forever. I do think that there is some room for optimism because if you look at the food prices, they are on a downward swing and in the last one year food prices have been the one category that has been responsible for slightly higher inflation then what maybe all of us were expecting. So I do think with the food prices coming down, with the rainfall having been fairly good and with a global scenario ensuring that oil also may not go up much.I do think that the RBI Governor, Dr Patel will have some room to cut rates or at least ease of the liquidity, because also remember that come October the FCNR redemption is going to put some liquidity stress on the banking system. He will have to alleviate that and will he alleviate that by cutting rates or by expanding liquidity as you are aware in the last 4 months RBI has injected almost Rs 100,000 crore into the market to just offset the FCNR redemption issues. That is going to be one of the first tests of RBI’s approach and I do think that there is a good probability that they might cut rate after taking confidence in the rainfall and the food prices coming down.On the other one, I think the RBI policy has been fairly clear that they want to open up the banking sector. I think this exclusivity about being a bank or getting a bank approval has started to go away and on tap universal licence, even small bank effectively is on tap if anybody wants to apply. We have been told that anybody can apply. The banking sector has opened up and it is for good and with the corporate bond market also starting to undergo change with the recent policy is going to be very exciting time, because the corporate bond market and the bank loan market will both in a way compete with each other, but will also coexist with each other.