Exclusive: Urjit Patel On Indian Economy Post Note Ban, Trump

Banks have told the RBI that the situation in metros and other big cities has stabilised, said Governor Urjit Patel.

The 18th floor office of the Reserve Bank of India (RBI) Governor in Mumbai has changed in the last two months. It’s much quieter.

There are no armed security guards outside the office – and the staff is not allowed to hold open the door for the Governor when he walks in. Urjit Patel does it himself.

Since he took over as the RBI Governor, Patel has had to manage two unprecedented events.

One global. The election of Donald Trump as the US President.

The second local. The demonetisation of Rs 500 and Rs 1,000 currency notes in India.

With the monetary policy announcement a few days away (December 7), Patel prefers to share the analysis of the economic impact of demonetisation then. In an interview to Quintillion Media’s Editorial Director Sanjay Pugalia, he speaks about the election of Donald Trump, which he believes will have a far-reaching impact on the global economy.

Further, he lists steps the RBI is taking to aid citizens short of currency.

While the demonetisation debate is on, one issue that hasn’t been discussed much is the election of Trump as the US President. What do you think will be the economic impact?

The outcome of the US presidential poll is significant in several ways given the pronouncement during the poll campaign. Two things are clear – the US will be less open to trade in goods, services and outsourcing. Indeed, Mr Trump has indicated that he is against the TPP (Trans-Pacific Partnership treaty).

Second, the US federal government is likely to expand its fiscal deficit to fund infrastructure, and so on. Both these things will play out in the backdrop of monetary policy tightening currently going on. The yield on the US 10-year bond has increased by about 50 basis points since 8 November.

The overall impact is that the US dollar is at its strongest level in the last 13 years and it has appreciated against the currencies of both the emerging markets and the most developed economies. Emerging markets have also witnessed a global risk off as portfolios get balanced in favour of the US, their home country.

How is this going to impact India?

India is relatively well positioned to handle the global shock. Our current account deficit continues to be modest. India continues to be a good long-term growth story, and therefore, an attractive FDI (foreign direct investment) destination. While the rupee is market-determined, we have the means to mitigate any undue volatility.

But now India faces another unexpected scenario post demonetisation. Many stakeholders and economists have said India’s GDP (gross domestic product) will take a significant hit. What according to you is the impact on our economy?

This is a pertinent question. We are analysing the impact internally and we will comment on this in next week’s monetary policy – on both the short-term and long-term implications.

This has caused huge disruption as people are still facing a lot of hardship in accessing their own cash. When do you think we will get back to a more normal situation?

When the RBI interacts with banks, they indicate that at least the situation in metros and other big cities is stabilising, and we are all working on reducing the inconvenience to everyone in other parts of the country.

Many see the RBI’s action of a cash reserve ratio (CRR) hike (to suck out liquidity) as punishing banks for no fault of theirs. Why such hasty actions?

This is a very temporary measure. We have already indicated to banks that the RBI is going to be lenient with banks. In the initial days of the incremental CRR hike, banks will not be penalised if they fall short in complying for a couple of days. Once the government is ready with market stabilisation scheme bonds, the RBI will immediately review the situation.

How is the effort to make India a predominantly cashless society playing out?

In such a transitional stage in a country like India, there are opportunities to speed up digitalisation, use of debit cards and e-wallets quickly. Otherwise, things take time. The RBI and banks have played their role to catalyse this process by fee waivers and other steps.