Credit rating agencies Fitch, Moody’s and India Ratings expect continuity in monetary policy under the new Reserve Bank of India Governor Urjit Patel, who takes office on September 4. They also said policies are more important than personality from the perspective of ratings. Thomas Rookmaaker, director, Asia-Pacific Sovereigns Group, Fitch Ratings, said, “Urjit Patel’s appointment as the next RBI governor signals a stronglikelihood of policy continuity.” He said the positive transformation set in motion by Raghuram Rajan, starting with the recognition of problems associated with both high inflation and weak bank balance sheets, was not yet complete. Having served as deputy governor in the past three years, Patel is well positioned to further institutionalise these policy changes, he added.
From a ratings perspective, policies are more important than personalities. “A central bank governor doesn’t need to have a rock-star status to be successful in reining in inflation or cleaning up the banking sector,” he said. Rajan was often called a ‘rock star’ RBI governor. Marie Diron, senior vice-president, Sovereign Risk Group, Moody’s Investors Service, said: “We assume continuity of RBI’s policies under the new governor.”
Diron said two sets of policies and decisions by RBI are relevant to India’s sovereign credit profile.
First, efficient transmission of credible monetary policy fosters a stable macroeconomic environment with inflation at moderate levels. The shift to inflation targeting at the beginning of last year has contributed to enhance the credibility and transparency of India’s monetary policy, Diron said. Future inflation developments will provide indications of monetary policy credibility. “We expect inflation to remain broadly stable around recent levels although there are sources of upside risks. First, the implementation of the Pay Commission’s recommendation could raise price and wage pressures in sectors beyond the public sector,” the Moody’s senior president said.
“Second, banking sector risk weighs on India’s sovereign credit profile. The clean-up of banks’ balance sheets has started and it would be credit positive from a sovereign perspective, if it led to improved bank capitalisation levels, renewed loan growth and robust risk processes. It involves a wide-ranging set of measures and will be a protracted process,” said Diron.
Devendra Kumar Pant, chief economist, India Ratings & Research, said: “Continuation in monetary policy will remain. He is the architect of the inflation targeting approach. Investors don’t want any change in policy direction.”
Pant said, “...coming from different areas, he knows how things are and what kind of action is required. The market will welcome [his appointment]. Maybe, you’ll see a strengthening of the rupee vis-à-vis dollar if globally there is no turmoil. You may also see bond yields responding.”
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DEVENDRA KUMAR PANT
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INTERNATIONAL MONETARY FUND