Government policies and interventions for development in various sectors
Indian Economy and challenges with regard to resource mobilization
RBI’s job involves trade-offs, not conflicts
Context: The economic crisis caused by COVID-19 pandemic has brought to the fore the role of Central Banks. This is to avoid the repeat of history where central bankers of the 1920s failed to fight the Great Depression.
The job of Central Bank involves complex trade-offs —
Next quarter(Short term) vs quarter century (Long term)
Growth vs stability
Mandates (accountability) vs Expectations (autonomy)
Some of the measures taken by Central Banks to tide over COVID crisis are:
Buying corporate bonds to improve liquidity in system
Making corporate loans to boost economic cycle
Cutting interest rates to spur investments
Conducting open market operations to keep rates low & adequate liquidity
Reducing reserve ratios to avoid banks parking their funds with Central Banks
Additionally, banks have been permitted to
Grant loan moratoriums
Hold less capital
Restructure loans
Pay lower deposit insurance premiums
Delay bad loan recognition
Majority of these measures have been undertaken by RBI also – Part I and Part II
RBI’s COVID measures is constrained by pre-existing conditions in Indian banking, some of which are as follows:
Bad loans (peaked at Rs 14 lakh crore but still large)
Inadequate competition (scheduled commercial bank numbers have remained between 90 and 100 since 1947)
Private bank governance (CEO so powerful that boards and shareholders are weak)
Public sector bank governance (shareholder so powerful that boards and CEOs are weak)
Way Ahead for RBI
Acting cautiously to balance the next quarter and quarter century
It must ensure that debt levels are not very high which imposes burden on future generations
RBI cannot mimic the model of developed countries as India’s position is different. For ex: US fiscal deficit is expected to be around 15 per cent of GDP and Japan’s public debt levels is nearly 240 per cent of GDP.
An analogy here will be “We are all in the same storm but we are all not in the same boat”
Acting flexibly to blunt this economic crisis
RBI’s mandate of Inflation targeting needs to be relooked in the light of economic disruption caused by COVID-19 pandemic
Other flexibility options include repayment moratoriums and bank windows for NBFC/Mutual Fund liquidity.
Acting within its mandate to ensure institutional legitimacy and immunity
RBI must build on its track record of wisely balancing the trade-offs between depositors vs borrowers, companies vs banks, and stability vs growth.
RBI must continue to stay out of excessive government interference.
Conclusion
Creating a prosperous India needs many things. One of them is an independent, accountable, and boundaried central bank that listens.
Connecting the dots:
Keynesian Economics
2008 Financial crisis and measures taken to come out of the crisis
