ARCHIVES: Challenges that new RBI Governor will face

Moneycontrol Bureau(Update: On August 20, the government announced Urjit Patel will take over as Governor of the Reserve Bank of India.)As the government homes in on a contender to replace outgoing Reserve Bank of India Governor Raghuram Rajan, there is a list of challenges that the new central bank chief will inherit.

The newcomer will have to battle the odds against inflation and currency volatility, among other parameters which Rajan has managed effectively to a great extent.

The contenders include RBI Deputy Governor Urjit Patel, NITI Aayog’s Vice-chairman Arvind Panagariya, former RBI Deputy Governors Subir Gokarn and Rakesh Mohan, SBI chief Arundhati Bhattacharya, Economic Affairs Secretary Shaktikanta Das and Chief Economic Adviser Arvind Subramanian.

Global and domestic policymakers, industry captains and experts have said that historically, India has produced talented and able leaders for positions as key as that of RBI Governor. Nevertheless, the job isn’t going to be a cakewalk as Rajan has only raised the bar. Here’s a list of some of the challenges the incoming governor will face.Focus on Inflation The RBI's goal to bring down retail inflation to 5 percent by March 2017 will be weighing on the new governor's agenda. Rajan's focus on inflation has made sure that his successor will have to keep a steady hand on the prices lever. Retail inflation jumped to a 22-month high in June. Given the highs, brokerage firms are saying the inflation target is a tough one to meet.

Redemption of FCNR Deposits

In 2013, Indian banks took on the fixed deposits of non-resident Indians. Later this year, about USD 25 billion will come up for redemption. While the outflows can't be stopped, the RBI will have to make sure that markets aren't shaken up. The new governor will have to make sure that there is liquidity in the market. 

Clean-up of Banks

The new governor has big shoes to fill in terms of sustaining Rajan’s plan to rid banks of stressed loans by March 2017. The new governor will be walking a tightrope in just trying to hold off banks' request for an extension to the clean-up deadline. Banks, of course, will have to make higher provisions for the loans identified as stressed under the RBI’s Asset Quality Review. Rajan is known to have frowned upon government's proposal to use the Reserve Bank's cash pile to refinance banks. Now, the new incumbent will have to listen to the government's will but act responsibly, too. Monetary Policy Committee

The monetary policy committee will be taking decisions on interest rates for the first time beginning this policy meet in August. The incoming governor may have to lead the charge for transition to a new framework of Monetary Policy Committee. Unlike the present situation, the new policy calls for an unanimous decision on rate cuts or hikes which will be taken by members of the committee.  In case of a tie, the governor’s vote counts. He will, however, have to ensure that he doesn’t have to cast his vote frequently.

Rate Cuts

The new governor will have to stay strong while resolving this quandary. He will have to weigh the macros and micros of the economic universe and set interest rates accordingly, without giving in to any pressure from various industries or even the government.  He will also have to make sure that the central bank functions without much interference from the government  — an issue which kept Rajan at loggerheads with the current government.