Raghuram Rajan had taken over as governor of the central bank in the world’s fastest-growing major economy in the thick of the taper tantrum in September 2013 when the local currency was depreciating every day against the dollar and inflation was in double digits. His predecessor D. Subbarao had witnessed the collapse of iconic US investment bank Lehman Brothers a few days after he had taken over, leading to the transatlantic financial crisis.

In contrast, Urjit Patel, the Reserve Bank of India’s (RBI’s) 24th governor who completes first year in office on Monday, took over the mantle when both the macroeconomic scenario in India and the external environment were relatively benign. However, he faced his litmus test two months down the line when Prime Minister Narendra Modi announced a radical plan to purge the financial system of black money.

Modi announced this in a nationwide televised address on 8 November night after a hurriedly convened board meeting of the central bank in Delhi, the minutes of which have not made public as yet. In the 50 days between 10 November and 30 December 2016, Rs15.44 trillion worth of currency notes of Rs1,000 and Rs500 denominations —some 86.9% of the value of total notes in circulation—were withdrawn to attack black money hoarders, fake currency and terror funding in the country.

Many believe that RBI was arm-twisted to toe the government line and Patel has a reluctant confrère for the exercise, which was shoddily implemented. While the jury is still out on the short-term pains versus long-term gains of demonetisation, RBI’s image as one of the finest banking regulators globally got dented and Patel has received the maximum flak. Till the publication of RBI’s annual report for 2017 (RBI follows a July-June fiscal year) on 29 August, speculation was refusing to die on the quantum of money that has come back into the system as RBI maintained a stony silence on this, giving the media a free rein to mock the governor.

Without committing to their “numerical accuracy and authenticity” and subject to “future corrections based on verification process” the “estimated value” of the currency that came back into the system as on 30 June 2017 is Rs15.28 trillion (98.96% of the currency notes demonetized), says the annual report.

For argument’s sake, even if we accept that the demonetisation  not in the best interest of the Indian economy, could Patel have prevented this? Section 26(2) of the Reserve Bank of India Act, 1934, says that on recommendation of RBI’s central board, the government may, by notification in the Gazette of India, declare that with effect from a date specified in the notification, any series of banknotes of any denomination shall cease to be legal tender. And, Section 7 of the Act says, “The central government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest.” So, the government’s advice to RBI on demonetisation is in accordance with the Act, which also permits the government to supersede the central bank if it believes RBI has failed to carry out its obligations.

Clearly, Patel could not have prevented this even if he wanted to. At best, he could have resigned (which a former RBI governor had suggested initially but later retracted the statement). What purpose would it have served except for adding a halo to Patel’s profile as a fiercely independent governor?

If we leave this part out, Patel has been doing a competent job. With every monetary policy, he has been evolving. And, he has not wavered from the twin mission of inflation-fighting and cleaning up the banks’ balance sheets—a job started by his predecessor.

A dramatic entry

Patel’s entry into RBI in 2013 was rather dramatic. Then governor Subbarao’s first choice was continuing with his deputy Subir Gokarn , who was in charge of the monetary policy. But finance minister P. Chidambaram spiked it as he felt that those who entered the central bank laterally “had become hostage to the technocrats in the RBI” and it was “necessary to bring some fresh thinking” (Subbarao has written this in his book Who Moved My Interest Rate?, to explain why Gokarn did not get another term).

Entered Patel with an impressive academic background—London School of Economics, Oxford University and Yale University. As a professional, he has had exposure to the International Monetary Fund, department of economic affairs in the ministry of finance, various high-level committees at both the central and state government levels, Reliance Industries Ltd, Infrastructure Development Finance Co. Ltd (now IDFC Ltd), the Boston Consulting Group and even a short stint at RBI.

Deputy governor

During his tenure as a deputy governor (for three years from 11 January 2013 and then another term which was cut short as he shifted to the corner room), he headed a very critical expert committee set up to revise and strengthen the monetary policy framework. Among other things, it had recommended that inflation should be nominal anchor for the monetary policy framework and constitution of a monetary policy committee (MPC) as the decision-making body. It also outlined the plan for developing the term repo market and creating a new instrument for liquidity management in the form of a remunerated standing deposit facility. While the first three recommendations have accepted and the new architecture is already in place, the RBI Act needs to be amended for the new liquidity management tool. I understand that the government is not too keen to do this at the moment.

Patel has been continuing with the war on inflation, which Rajan had waged, and not toeing the government line on interest rates. He pared the policy rate by a quarter percentage point in August, not under pressure from the government but after being convinced that inflation has been well within the RBI target (4% +/- 2%), but refused to change the stance of the monetary policy from neutral to accommodative. This means future actions of the central bank will be driven by data—the rate can be cut only if MPC is convinced that inflation will go down further. His cautious approach is reassuring for those who root for a long-term sustainable growth for the Indian economy.

Saying ‘No’ to Finance Ministry

Ahead of this, in the run-up to the June policy, Patel spurned the invitation of the finance ministry for a meeting in Delhi. The finance ministry wanted to have two separate meetings, one with MPC members from RBI and another, with the outsiders (three in each group). All MPC members declined the request for the meeting. The background of this was a hawkish April policy statement (after the monetary policy stance changed from accommodative to neutral in February), leading to the first outburst by the government. Arvind Subramanian, chief economic adviser to the government of India, was vocal against MPC as well as the central bank for not cutting the policy rate despite considerable easing of inflation pressure.

Patel has also made public his displeasure with the farm loan waivers announced by quite a few state governments as it destroys the credit culture. He has used the all-important post- monetary policy press conferences to voice his displeasure on the finance ministry’s attempt to influence MPC and farm loan waivers by different states. The latter came after Uttar Pradesh chief minister Yogi Adityanath announced that he was going ahead with his party’s poll promise to farmers. Farm loan waivers, according to Patel, pose a serious moral hazard and are “inflationary”, as opposed to Subramanian’s view (“deflationary”).

However, it will be wrong to interpret that Patel revels in fighting the government. When it is needed, he putting up a joint show with the government to serve the purpose. For instance, the RBI Act allows the central bank to direct commercial banks on certain things if it wants to, but RBI wanted the government to pass an ordinance for the demonstrative effect—both the government and RBI are on the same page when it comes to fighting the menace of bad loans; it is not the case that RBI wants to resolve the bank loan problem even as the government is shielding corporate India. Armed with this, RBI first instructed the banks to move the insolvency court against 12 big borrowers which account for one-fourth of the bad assets and followed it up with another round, identifying at least two dozen borrowers.

As a natural follow-up of bad loan resolution where banks  encouraged to take deeper haircuts, the corporate defaulters  staring at losing their business empires. Patel has been closely working with the government on likely capital infusion in deserving banks and merger of those that are fast losing relevance, to reduce the number of state-owned banks and adding scale.

RBI governors

He cannot escape comparison with Rajan. For that matter, all RBI governors are being compared with each other. Bimal Jalan, who took charge in the thick of the East Asian crisis in 1997, did a remarkable job in rescuing the rupee; he was more like a statesman who could keep every quarter happy. Y.V. Reddy, who succeeded Jalan, was fiercely independent; his five-year tenure has been unique for low inflation and high growth. Subbarao parachuted into RBI headquarters directly from the North Block, which houses the finance ministry, but soon found his feet and fought with the ministry on many issues in full public glare.

Rajan did a great job in bottling inflation, protecting the rupee and creating macroeconomic stability but with his international aura, he behaved more like an academician when it came to voicing opinion on different economic issues. Patel, in contrast, restrained; he hardly talks. I could detect only one instance where he spoke on a subject which does not exactly fall in the domain of an RBI governor. At an IMC Chamber of Commerce and Industry event, he had said he was not “overly pessimistic” about the employment scenario in the information technology sector as the mushrooming start-ups could compensate for job losses. It’s very different from what, for instance, Rajan had said on the government’s “Make in India” initiative or India’s growth story.

Communication has never been Patel’s great strength but that cannot be an inhibiting factor. Jalan had Reddy to talk to the market; Reddy had his deputy governor Rajesh Mohan; and Patel has Viral Acharya in charge of the monetary policy.

Indeed, one year is not an ideal time frame to evaluate an RBI governor and put tick marks on the report card but I would like to believe that Patel is maturing fast and he will not disappoint us. His wont to keep a low profile will keep the government happy but his actions may not, always. A Rs13,190 crore provision that the central bank made towards its contingency fund in its 2017 balance sheet  one such instance. It pared RBI’s dividend payout to the government. Had Patel wanted, he could have avoided such a hefty provision to generate a higher dividend. Prudence is the hallmark of a good governor.