“We assume continuity of the RBI’s policies under the new Governor, Dr Urjit Patel,” Marie Diron, Senior Vice President, Sovereign Risk Group, Moody’s, said.
According to Moody’s, two sets of policies and decisions by the RBI are relevant to India’s sovereign credit profile.
“First, efficient transmission of credible monetary policy fosters a stable macroeconomic environment with inflation at moderate levels. The shift to inflation targeting at the beginning of last year has contributed to enhance the credibility and transparency of India’s monetary policy,” she said.
According to Diron, future inflation developments will provide further indications of monetary policy credibility.
“We expect inflation to remain broadly stable around recent levels although there are sources of upside risks. First, the implementation of the Pay Commission’s recommendations could raise price and wage pressures in sectors beyond the public sector.”
“Second, with around half the consumer price basket accounted for by food items, headline inflation will be largely accounted for by developments in food prices which are less predictable than other price developments, posing a challenge to the RBI,” Diron added.
She said the banking sector risk weighs on India’s sovereign credit profile. The clean-up of banks’ balance sheet has started and it would be credit positive from a sovereign perspective, if it led to improved bank capitalisation levels, renewed loan growth and robust risk processes. It involves a wide-ranging set of measures and will be a protracted process.
In its reaction, Fitch Ratings said Patel’s appointment as the next RBI Governor signals a strong likelihood of policy continuity.
The positive transformation set in motion by current Governor Raghuram Rajan, starting with the recognition of the problems associated with both high inflation and weak bank balance sheets, is not yet complete, said Thomas Rookmaaker, Director, Asia-Pacific Sovereigns Group, Fitch Ratings.
“Having served as Deputy Governor in the past three years, Urjit Patel is well-positioned to further institutionalise these policy changes in the period ahead,” Rookmaaker said.
“From a rating perspective, policies are more important than personalities. A central bank governor doesn’t need to have a rock star status to be successful in reining in inflation or cleaning up the banking sector,” Rookmaaker added.