CURTAIN RAISER. Urjit Patel’s first policy starts with MPC advantage

All new governors, their pedigree or storied credentials notwithstanding, would be nervous before their first policy announcement.

They would be keen to make a good impression — to communicate to the world at large and markets that they have a safe pair of hands. That’s an emotion not very different from what a new CEO or presidential candidate may want to convey about himself or herself.

For central bank governors, the challenge is a little more tougher. They are not elected and, therefore, they have no core constituency to pander to or back them loyally.

But while their actions do affect the interests of everyone, their statements and body language will certainly be put through a microscope by an amorphous, fluid, ever-changing and often fickle group of influential people — market-men, industrialists, government officials and even the media.

Getting the optics right with this group is probably as important as the message itself.

The nervousness that new governors may feel is often in some measure due to the big shoes they fill in — and their predecessors’ halo can often seem overwhelming.

If Urjit Patel does feel that at all, taking over from a ‘rockstar’ with formidable communication skills, he is not alone and won’t be the first or last one to feel that.

Governor Subbarao inherited the mantle from YV Reddy, a man with a reputation for standing up to the powers that be, and who had acquired a larger-than-life halo in the wake of steering India successfully in the run-up to the global financial crisis, which began in 2008.

Now, Subbarao was no spring chicken, having been the incumbent Finance Secretary with even an outside chance of becoming Cabinet Secretary. Yet, as he conceded in a recently published memoir, what you say as governor is completely different because so much seems to hang on what you say and how you say it.

Certainly, the first challenge for any governor is to establish that he is his own man and not a lackey sent by Delhi to do its bidding. Perhaps the most visible perception battle that he will have to fight is on setting interest rates.

This is where Urjit Patel starts with a great advantage over all his predecessors.

The constitution of a monetary policy committee of six members (with three external members) gives that critical decision of setting interest rates a certain credibility which earlier decisions never enjoyed — even if they were made independently.

If Urjit Patel were to cut rates tomorrow, the market will not have the suspicion that he did it out of gratitude for his appointment or that he is returning past favours.

It will know that a group of people made the decision, competent in their own right, and weighing in with their collective wisdom and without being burdened by the pressure of expectations.

It will be seen as just another decision without ascribing motives or looking for hidden signals.

No governor is immune to pressure from the Finance Minister or his senior officials. As some of them will concede (after their term is over, of course), the pressures are manifold and relentless and subtle.

When relations between North Block and Mint Street come under strain, even routine decisions get combed for signs of caving into pressure.

The most important benefit derived from a monetary policy committee (MPC) here on will be a certain continuity in approach irrespective of who is appointed as governor.

In a way, this is an attempt to ‘de-personalise’ the rate-setting decision — to reduce the dependence on the genius of one man or woman and rely on collective wisdom.

Governments too do not need to fear that the governor is not playing ball, has gone rogue or is too independent and worry about muzzling him.

Urjit Patel faces his first test tomorrow with better armour than any governor had before. One of his predecessors had, partially in jest, wanted to make the monetary policy announcement a ‘non-event’. That is unlikely — given its importance to the economy at large.

But, yes, the drama surrounding the announcement may come down. That, in the arcane world of central banking, may still be progress.