With Urjit Patel set to take over as next Governor, RBI may continue its anti-inflationary stance and keep key policy rates on hold for the rest of the year, Goldman Sachs said today.
According to the global financial services major, Patel’s appointment as the next RBI Governor will lead to policy continuity. He will replace Raghuram Rajan and take the helm of the central bank starting September 4, 2016.
“In our view, Patel is likely to maintain similar views as Governor Rajan in the inflation targeting, banking sector reforms, overall liquidity, and exchange rate policy area,” Goldman Sachs said in a research note.
The recently announced inflation targeting framework sets a headline CPI inflation target of 4 per cent +/- 2 per cent until first quarter of 2021. In addition, the RBI outlined in its monetary policy statements that it aims to bring headline CPI inflation down to 5 per cent by March 2017.
“Given that the formalised inflation target is in line with the Urjit Patel Committee report, we think the RBI’s view on inflation targeting under the new governor will be unchanged,” the report said.
Regarding cleaning of bank balance sheets, the report said that Goldman Sachs expects Patel to continue the process and adhere to the March 2017 deadline set by Rajan. He (Patel) is also likely to continue to infuse sufficient liquidity into the system as required and bring the overall banking system liquidity close to neutrality.
Regarding monetary policy stance, the report said that it expects the RBI to keep rates on hold for the rest of 2016 as upside risks to the interim glide path of 5 per cent by March 2017 remain.
In its last monetary policy statement, the RBI also acknowledged that risks continue to be tilted to the upside, stemming from a recovery in crude prices, narrowing of the output gap and the full implementation of the 7th Pay Commission covering allowances.
On August 9, Rajan in his last monetary policy review left interest rates unchanged as inflation hit near 2-year high and had said that the central bank’s stance remains “accommodative”.