Redemption of FCNR (B) deposits
Urjit Patel took over as 24th governor of the Reserve Bank of India (RBI) on Sunday. However, the ceremonial scroll signing exercise, which transfers the power from a former governor to a new one will happen on Tuesday, after the central bank opens on Tuesday, following two holidays.
Here is the list of few immediate challenges that the new central bank governor will have to tackle with. For the smooth sailing of all these, he has to constantly communicate with the market and the banking sector at large. Given that the new governor is not known for his public communication exercise, he has to surely shed that practice and be more voluble in public.
The Reserve Bank of India (RBI) raised about $26 billion through these deposits in September-November 2013. Most of the deposits are getting due this year and the central bank has guided that the resultant dollar outflow (about $20 billion) could create temporary liquidity crisis in the market. Given that the central bank has build up a formidable reserve and solid long position at the forwards market, the redemption per se won’t be a problem. But there could be a short term blip, which the new governor should talk down in the market.
Inflation has started inching up, led by food prices even as global commodity prices, particularly that of oil has started ticking up. Inflation for July crossed 6 per cent, much higher than RBI’s target range. But the central bank expects the August number to be a soft and in any case, the target of bringing down inflation to 5 per cent by March 2017 should be achievable. However, if inflation continues to remain high, it would seriously jeopardise RBI’s efforts in containing long term inflation at 4 per cent, as per the monetary policy framework’s inflation targeting model, of which, Patel is the key architect.
Raghuram Rajan was criticised for his stern take on inflation and not reducing rates enough. The new governor may have to cut rates sharply to let growth take place in a broad based manner. Certainly, this is what the government and the industry body want. But Urjit Patel’s appointment means continuation of RBI’s hawkish stance. It would be interesting to see how the new governor balances industry expectations with his target of containing inflation.
Asset quality resolution
Public sector banks’ gross bad debt neared Rs 6 lakh crore at the end of fiscal 2015-16 as banks reported heavy bad debts under RBI’s asset quality review. The challenge that remains now is how the central bank will go about with the resolution process as RBI’s previous schemes have not been very effective.
Public sector bank capitalisation
Indian banks need more capital to meet credit demand at a growing economy. For now the capital is adequate, but has seen serious erosion with the rise in bad debts. So much so that the erosion was even higher than government’s capital infusion of about Rs 25,000 crore.
The government has already taken the first step by announcing that the associated banks of State Bank of India will be merged with the parent. It also wants to privatise IDBI Bank as a precursor to larger consolidation move in the Indian banking industry. The new governor will have to oversee the consolidation.
Monetary Policy Committee
Patel will be the first governor who would be part of a monetary policy committee to decide on policy rates. It would be imperative on the governor to maintain RBI’s own agenda of protecting inflation and not get swayed by government representatives in the board who would want growth to pick up through softer rates.
Development of bond and forex market
One long term agenda for the new governor will be the development of the corporate bond market and seeing through the bond and foreign exchange market reforms measures that former governor Rajan announced a few days before his term came to an end. Given the measures were done in consultation with Patel, it would be right to assume that Patel has his own vision on the matter, which he would spell out in the coming days.