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New RBI governor Urjit Patel likely hawkish on easing, less outpoken than Rajan

India's new central bank governor is likely to be less outspoken than outgoing chief Raghuram Rajan, but no more inclined to easing.

Currently deputy governor at the Reserve Bank of India (RBI), Urjit Patel will take the helm on September 4 for a three-year term, with a possible two-year extension.

Since 2013, Patel has run the RBI's Department of Monetary Policy and Research, as well as spearheading an expert committee—known as the Urjit Patel Committee Report—that recommended key changes to the country's monetary policy framework. Among the committee recommendations was the creation of a Monetary Policy Committee (MPC), first discussed in 2014 and approved by the government earlier this year.

Urjit Patel, the new incoming governor at the Reserve Bank of India (RBI)
Indranil Bhoumik | Mint | Getty Images
Urjit Patel, the new incoming governor at the Reserve Bank of India (RBI)

The MPC will consist of the RBI governor, two RBI employees [one of whom will be Executive Director Michael Patra] and three external members appointed by Prime Minister Narendra Modi's government. The MPC effectively institutionalizes the government's role in central bank decision-making, making Rajan the last governor to have taken an independent policy decision.

Patel's committee also recommended switching to more flexible inflation targeting based on headline consumer price inflation (CPI) instead of wholesale price inflation (WPI).

The bulk of market players believe the new governor will continue Rajan's policies in the areas of inflation targeting and exchange rates, because they harmonized with Patel's own beliefs.

"We believe, with Dr. Patel's announcement, the RBI's approach to inflation and setting of interest rates will not be very different from that under Governor Rajan, particularly now that the framework has been largely institutionalized," said J.P Morgan economists in a note, referring to the Urjit Patel Committee Report.

On the topic of banking sector reforms, Patel is also set to follow in Rajan's footsteps.

"While Dr. Patel in his current role has not been directly involved in asset quality review process of bank balance sheets, we expect that he is likely to continue the process of cleaning up of bank balance sheets and adhere to the March 2017 deadline set by Dr. Rajan," Goldman Sachs economists noted.

When it comes to Patel's approach to liquidity, however, not all commentators were in unison.

Some banks warned that Patel was unlikely to hold a strong easing bias.

"Markets (and we) were expecting a dovish or neutral candidate to take over as the RBI governor following Rajan. Dr Patel's appointment is a surprise because he is generally seen as hawkish, which may dash hopes of aggressive easing," Nomura said in a note.

Nomura expects a final, 25 basis-point rate cut for the last three months of the year, based on estimated sub-5 percent inflation readings. But because two of the six MPC members—Urjit Patel and Michael Patra—were on the hawkish side and given the governor had the deciding vote, Nomura reduced the probability of easing to 55 percent from 65 percent.

Royal Bank of Scotland (RBS) echoed those sentiments.

"As the architect of India's inflation-targeting mechanism, and given his recent speeches, our read is he is likely to have a slightly hawkish bias in the short-term. This may see the market move some of the rate cuts further along the curve," said Vaninder Singh, Asia economist at RBS.

Mizuho, meanwhile, warned that consumer prices would have to drop significantly after rising at a faster-than-expected annual pace of 6.07 percent last month, up from June's 5.77 percent, in order for more easing to happen.

"Patel's preference for appropriately positive real rates rates (1.5 to 2 percent) suggests that inflation needs to subside substantially from around 6 percent before the policy rate may be reduced from 6.5 percent," Vishnu Varathan, a senior economist at Mizuho Bank, said.

Calling the new governor "fiscally conservative," Nomura also noted that Patel may be cautious about opening up debt markets to foreign investors. At present, foreign investors are allowed to own $51 billion of corporate bonds.

Patel's personality also sets him apart from his predecessor.

Rajan was an outspoken critic of the government's management of social issues, particularly crony capitalism, police corruption and religious violence, which often resulted in tensions with conservative members of Modi's ruling Bharatiya Janata Party (BJP).

Patel on the other hand has maintained a low profile throughout his years at the RBI, and is expected to keep a quieter style of communication, Nomura said.

DBS economist Radhika Rao agreed.

"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," she said.

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