Urjit's persuasion skills to help him: Patel's doctoral advisor

Q: There are couple of institutions that the Rajan era has left behind, one, the inflation index to be targeted would be the CPI, that eventually the glide path would be to bring CPI down to 5 percent in January 2017 and to 4 percent perhaps by January 2018 and third, that this would be achieved by a monetary policy committee and not just by the governor alone. Your comments on all these institutions? Do you think Urjit Patel would be successful in achieving all these?

Srinivasan: Indeed, he would be. He has the capability to take along those who work with him in his analysis. For example, the paper he did on inflation targeting was one of the very well thought out papers and it went a long way in persuading his colleagues to follow the inflation targeting approach. 

Second thing, I have a strong feeling that his persuasive power will come in very handy in taking the other members of the monetary policy committee along when you need to do a change that requires some arguing and some persuasion.

Urjit in Sanskrit means strong, powerful, spirited and also distinguished and all these attributes, Urijt Patel has and I am confident he will put them to good use.

Q: The Indian central banker has to be a full service central banker, there are major responsibilities in terms of banking supervision. Now with the digitisation and resultant disruption in the banking space, a lot of the bandwidth of the central banker will be concentrated on the banking space. Tell us something about Urjit Patel's knowledge and command over the banking space?

Srinivasan: Urjit Patel's knowledge I can tell you only indirectly. I am not a macro economist per se, so my assessment of what macro economists do is based primarily from my judgement on whether what they are advising will help in accelerating the growth of the economy, in reducing the poverty at faster rate than is happening now. So, I am looking at the monetary policy from an objective of real economy.

Keeping that in mind and I am again judging from what I know of him as a student and also subsequently in my conversations with him on many matters, I think that he has the right mindset to listen to other people and also take their views along in formulating a proposal that would carry greater weight not only inside the committee but also would be persuasive for the financial community and more so the general public.

Q: Any central banker these days especially since 2008 requires a very good command of what is happening in terms of global flows, inflows and outflows into emerging markets, into the country as well as a handle on how things might turn on dime. Your thoughts on Urjit Patel's work in this area and command in this area?

Srinivasan: I know his work in the area in the trade side rather than the finance side. On the trade side, he has very good command of the tools.

Micro economics what I call has eternal verities. There are propositions of micro economics, which hold across space and across time with very little change, whereas in macro economics there are temporary verities.

Today's macro is not tomorrow's macro, was not yesterday's macros. So, you have to be nimble on your feet if you are a macro economist. So, with a stable feet on the micro side and on external verities with nimble feet to respond to changing macro situation as well as analytics, I think Urjit Patel would do good job.

Q: There is this very important paper along with Willem Buiter which Dr Patel authored on debt deficits and inflation in India that laid the foundation for fiscal discipline and timetable of bringing down fiscal deficit in the 90s. There is a need for that to be followed again. Do you think Dr Patel will be able to get the finance ministry’s mandarins to cooperate this time around especially as we head towards elections in a couple of years?

Srinivasan: Well, first of all I will argue that Dr YV Reddy was the governor of the Reserve Bank before Raghuram Rajan and D Subbarao, he was responsible. The first agreement with the Government of India -- finance ministry -- that the automatic financing deficit will no longer take place and that brought the discipline to the monetary policy making that didn’t exist before.

The second thing is following on. There were other policies recently another governor of Reserve Bank, my good friend Rangarajan, brought a lot in one of the newspapers about what happened in the monetary policies around that time.

So a number of things in the monetary policy area have been implemented over the years since the 90s and so Urjit is starting from a situation which is many ways far better than the macroeconomic situation was in the early 90s. Remember the 1991 crisis and so on. Think that gives him an advantage as he is not starting on a crisis area. He is starting where the monsoon being as good as it seems to be doing and with the exports hopefully turning around, he should be in a much better position to do what is necessary for bringing the growth back if he can to 7-8 percent preferably hopefully and somewhat enthusiastic and optimistic to 9 percent.

At the same time, this is for the fundamental objective that has been with us right from Jawaharlal Nehru’s national planning committee of 1938 -- that is to remove the abject poverty in which many of our people still live.

Q: The Reserve Bank’s cutting of interest rate by 150 basis points did not ensure transmission as much as the Reserve Bank pushing in more liquidity, buying of Government of India bonds or open market purchases. There is a trepidation that Dr Patel being a pure-breed economist may not favour this level of open market purchases. Do you harbour such fear at all?

Gambhir: I don’t harbour that fear for the simple reason that the fact that these bonds have to be purchased in the open market is a decision that in my opinion would have been taken in consultation with the monetary policy department of the Reserve Bank.

Knowing the way the Reserve Bank as an institution functions, it’s highly unlikely the RBI took this decision without the concurrence of its monetary policy department. Certainly, the deputy governor who is running the monetary policy department, so I feel that in some senses, Dr Patel would have been bought into this decision even while he was a deputy governor. I expect that he will sort of continue with this decision of the Reserve Bank specifically because if there is sort of departure from here there could be credibility issues around it. I do feel that there is a very strong likelihood and I do hope that in his new avatar as the governor, he will continue with the decision that he was being party to as a deputy governor at Reserve Bank.

Q: What are your thought, we have had to buttress rate cuts with liquidity. Do you think that is the way to go forward or do you think one should beware of the fact that inflation is now again over 6 percent and therefore be careful with doses of liquidity?

Srinivasan: You have to be very clear about what you think is the binding constraint of the movement on growth and other objectives of the society. Now, if already liquidity is adequate, there is no point in further addition to the liquidity or lowering interest rate. You cannot go against logic and microeconomic is a strong logic and so in my view, at the moment the evidence is not strong to suggest that the economy is heavily constrained because of an inadequate liquidity.

If anything it is constraint on other things that will matter such as for example infrastructure, project completion, labour market -- there are many areas, which are constraining us -- which in my view would require immediate attention much more than the liquidity, which is already at fairly adequate.

Q: This glide path of 4 percent by January 2018, now at 6 percent inflation would you urge that your student, Dr Patel get to 4 percent, keep that goal in place for January 2018?

Srinivasan: It depends. One shouldn’t react to short term fluctuations in inflation rates one way or the other. Now also you have to watch the difference between what is happening to the consumer price inflation (CPI) and wholesale prices.

At the moment, even though the path of CPI and wholesale price index (WPI) seem to be divergent. I still suggest that it may be that inflation pressures are building up, but I would wait for little bit more evidence to come in before making a firm decision to go one way or the other.

At the moment, I don’t see the evidence strong enough to suggest the pressures are already there and will go up or down.

Q: How would you interpret Dr Patel’s taking over to those who ask you questions about the rupee?

Gambhir: I think it is certainly a continuation of Dr Rajan’s policy of making sure that we have a reasonably stable currency and probably more active intervention on both sides of the market.

In general, if you have a somewhat hawkish central bank or central bank governor, the currency tends to have a bias of appreciation, which I feel that would be the case here as well.

I think one of the biggest challenges that Dr Patel will have to sort of contend with is two-fold, first in the immediate term, we have this foreign currency non resident (FCNR) redemption so to make sure that we don’t have unnecessary volatility in any of the markets whether it is currency or money market as a result of that redemption.

Secondly, in the short term to some extent given the fact that the global central bankers are still pursuing very loose monetary policies, the spillover effects to emerging markets -- and certainly in this case rupee has been fairly stable and somewhat strong, that need to be contended with in my opinion.

Q: Anything you expect from Urjit Patel on digitisation, disruption of financial sector or even corporate bond market we are expecting some announcements?

Gambhir: There is a whole host of things that he has to contend with. We are going through fairly interesting times as far as the Indian banking sector is concerned. On one hand we have this issue of overhang of NPAs, on the other hand we have the issue of technology. So, there is a lot of things that he has to contend with but as a market participant I would expect to see more of effort on opening up and development of the markets.

I think on the inflation front, a lot of heavy lifting has been done, institutional reform has been put in place, I think attention now needs to shift towards seeing as to how the banking side and the capital market side of the financial system can speak with each other a lot more efficiently and be sort of collaborative in terms of doing monetary policy transmission, which has been a big issue with Indian economy so far.