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New RBI Governor’s First Challenge Is To Redeem FCNR Deposits

Urjit PatelThe newly appointed Governor of the Reserve Bank of India (RBI), Urjit Patel has three big priorities ahead of him which are managing the redemption of $20-25 billion FCNR deposits, controlling inflation in the country and continuing the banking clean-up process initiated by outgoing Governor Raghuram Rajan.

Patel will be taking over as the 24th Governor of India’s Central Bank during early September. Most experts have said that his appointment indicates continuity in the country’s monetary policy. Patel has worked with Rajan for several years, most recently as Deputy Governor of RBI.

The first challenge before him is to ensure that the redemption of the FCNR deposits are carried out without disrupting the market.


The FCNR deposits were initiated when the rupee went into a freefall in September 2013. Around $26 billion was raised through foreign currency non-resident bank account (FCNR-B) deposits and later swapped for dollars. These deposits begin maturing from next month onwards

In a statement, Rajan said the

Reserve Bank will continue with both domestic liquidity operations and foreign exchange interventions that should also enable management of the FCNR(B) redemptions without market disruptions.

The RBI has been increasing its liquidity position through numerous open market transactions and spot intervention in forwards market. During Rajan’s tenure, RBI interventions in the forward market have been much higher than before, mainly due to the these deposits and a shift in policy with respect to liquidity management.Between 2013 and 2016, the average forwards market position of RBI was $10 million. The average position was $3 billion during the tenure of former governor D. Subbarao and $2.5 billion in the case of Y.V. Reddy.

Another key priority for Patel would be to appoint a member on the Monetary Policy Committee (MPC). The constitution of the MPC has resulted in the interest rates decision-making process shifting from the RBI Governor to the Committee. The six-member Committee is headed by the Governor and comprises of 50 percent of nominees from Reserve Bank and the remaining from the government. Rajan had appointed Michael Patra and Patel as nominees of the RBI to the MPC. With Patel becoming the Governor, a new member would have to be appointed in his place.

The Modi government has set the target inflation rate to be 4 percent till 2021 based on which the MPC will henceforth take policy decisions. Patel is known as a seasoned economist with past experience spread across the International Monetary Fund, Reliance Industries and IDFC in addition to having worked as a Consultant with several government ministries and committees.

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