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Informist, Wednesday, Jan. 15, 2025

 

By Siddharth Upasani

 

NEW DELHI – It is unusual when the exit of a deputy governor of the Reserve Bank of India is a momentous occasion. But then, Michael Patra was no ordinary deputy governor.

 

Barring a last-minute surprise, Tuesday was Patra's last day at the Indian central bank, and he leaves the RBI as arguably its most influential official of the last decade, including the various governors he served under. As the deputy governor in charge of the crucial monetary policy, economic and policy research, and financial markets operations departments, among others, Patra exerted enormous influence over Indian policy and financial markets.

 

Nominated to the Monetary Policy Committee by the RBI's central board of directors right at the committee's inception in October 2016 while he was still an executive director, Patra has been part of all the 51 interest rate decisions the panel made so far, a feat no one else can match. Over the course of the last eight-and-a-bit years, he moved up to become a deputy governor in January 2020, before earning one-year extensions in 2023 and 2024.

 

However, Patra had a say in Indian monetary policy much before October 2016. As the executive director in the monetary policy department, he was one of the key officials Raghuram Rajan consulted before making interest rate decisions in the era when governors were solely responsible for them. Go back a couple of years to early 2014 and Patra was a member of the Urjit Patel-led expert committee largely responsible for the flexible inflation targeting framework as we know it today.

 

HAWK TO DOVE

Starting off at the Monetary Policy Committee as the archetypical inflation hawk, Patra warned in his statement in the minutes of the first-ever meeting of the committee that the inflation "beast" had not been beaten "or it's back broken"--CPI inflation stood at 5.05% at the time of the meeting--and that it was crucial to "step up vigil around the upturn in inflation projected...to guard against any risk to the target". And this was when the MPC surprised by cutting the repo rate by 25 basis points to 6.25%.

 

Patra's status as a hawk was cemented just a few months later in April 2017 when he famously quipped that "whether elephants fight or play, the grass suffers", referring to the upside risks to inflation. With Urjit Patel as the governor and Viral Acharya as deputy governor, Patra formed the third point of the RBI's anti-inflation trident on the MPC.

 

But if the degree of Patra's hawkishness had central bank watchers on tenterhooks, a change in his views coinciding with Patel's resignation left even his fellow committee members puzzled. Cautioning in December 2018 that "softer inflation prints could likely lull inflation expectations" and "abundant precaution and decisiveness in quelling risks to the target are warranted if the hard-earned gains in terms of macroeconomic stability and credibility are to be preserved", Patra voted with the MPC to leave the repo rate unchanged at 6.50%. At the time, CPI inflation was 3.38%. Two months later in February 2019, Patra voted to cut interest rates along with two of the three external members and new RBI governor Shaktikanta Das. Das' deputy, Acharya, meanwhile dissented. Until then, Patra had voted for more rate hikes than anyone else on the MPC.

 

To be sure, Patra argued his move was grounded in new data--CPI inflation had fallen further to 2.11% at the time of the meeting. However, he began his statement in the minutes by saying inflation was bottoming out and was likely to rise over the coming year.

 

HANDLING THE MARKETS

Unlike his monetary policy actions, Patra's handling of financial markets was more behind the scenes. Right from bond yields to the exchange rate, all bear Patra's imprint, be it in the strategy followed by the RBI or the logic governing them.

 

To understand just how influential Patra has been in day-to-day market issues, Nomura's strategists said the following last week on the RBI's liquidity management: "...there has been a lot of speculation on the replacement of Deputy Governor Patra, as his term will end next week. We will closely watch RBI actions next week for any hint of a change in strategy."

 

Of course, Patra and the markets were not always on the same page. While some disagreement is to be expected between markets and the RBI due to their conflicting objectives--profits are more likely in times of volatility, which the central bank abhors--the outgoing deputy was seen as shifting the goalposts when it came to his views on subjects such as liquidity and real interest rates. Not helping matters was the language and stance of Patra's minutes, which were perceived to have undergone a sea-change in early 2019.

 

These disagreements were for all to see during the coronavirus pandemic. Having infused record amount of liquidity in 2020 to support the economy, the government bond yield curve was labelled by the RBI as a 'public good' to keep interest rates low. Markets, however, did not believe the RBI could do so for long, especially with inflation at 6-7% and having avoided failure in 2020 only due to a technicality.

 

What followed was extraordinary by the RBI's sedate standards: in the March 2021 State of the Economy article, which counted Patra among its authors, those sceptical of the central bank's promise to remain accommodative were branded 'bond vigilantes'. But there was more: "The Reserve Bank is striving to ensure an orderly evolution of the yield curve, but it takes two to tango and forestall a tandav."

 

The divergence between the market and the RBI continued to increase, with the central bank increasingly looking like it was behind the curve in raising interest rates--which it began in earnest in May 2022 when it became clear there was no avoiding failure this time around.

 

Patra has his fair share of detractors. But as the intellectual shield of the RBI--which says something considering the central bank is packed to the rafters with economists--his successor will have fairly large shoes to fill.  End

 

Edited by Akul Nishant Akhoury

 

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