Reserve Bank of India @90: Way ahead

Prof. Prashanta Sharma

(Head of the Department of Commerce, Gauhati University)

Dr. Siddharth Nayan Sharma

(Assistant Professor, Department of Banking and Finance, S.B.M.S. College, Sualkuchi)

 Mr. Deepjyoti Das

(Assistant Professor, Department of Accountancy, S.B.M.S. College, Sualkuchi)

Ten years into its centenary year, RBI is at its historic 90 years of existence with its professionalism and commitment towards the Indian Banking System. RBI started its operation on April 1, 1935, and entered its 90th year on April 1, 2024. At the opening ceremony of RBI@90, an event acknowledging this historic moment of the Indian Financial System, the Prime Minister, Narendra Modi, also released a commemorative coin of Rs. 90. He relates the RBI’s prudent role in achieving fast-paced growth in line with the ‘Vikshit Bharat’ vision of ensuring trust and stability. Over the years, RBI, being a citizen welfare institution, has been striving to propel a stable and resilient financial system. Given the rapid changes in today’s world, especially in the areas of technology, innovation, business practices, and growing complexities in the financial sector, the RBI is constantly evaluating emerging trends and taking necessary policy measures. From being a central bank primarily concerned with the allocation of scarce resources during the planning period, the RBI has gradually transitioned into being an enabler for the market economy. According to the preamble of the RBI Act, the central bank’s primary responsibility is to maintain price stability while keeping in mind the objective of growth. An independent central bank plays a critical role in the macroeconomic management of a country. Coordination between monetary and fiscal policies is critical for the economy and for creating a “Vikshit Bharat.”.

Over the forthcoming years, as the stride for change accelerates further, the RBI must get ready for the many challenges that may arise. In addition to effective regulation and supervision, the RBI may have to deal with changes in mechanisms of payment and the Central Bank Digital Currency (CBDC). CBDC, or Digital Rupee, is an electronic form of sovereign paper currency. CBDC is a legal tender exchangeable at par with the existing paper currency issued by the Reserve Bank of India (RBI). It is issued in the form of digital tokens in multiple denominations, similar to that of paper currency. CDBC-Retail, referred to as CBDC-R or Digital Rupee, is an electronic version of cash predominantly meant for retail transactions. It must also be watchful of the risks of unanticipated events. Looking towards the next decade, the RBI must learn from its past, fine-tune and acclimatise, and plan for the challenges it could bump into on its journey towards its centenary.

In the past nine decades, the Indian economy and the RBI have confronted many difficult situations. In the recent past, these include the 2008 global financial crisis and the taper tantrum crisis of a slowdown in the demand for government bonds in 2013. In 2013, demonetization along with the pandemic persuaded disruptions to economic activities. There was also the issue of bad loans plaguing the banking sector. In this context, it is remarkable the way RBI handled the twin-balance sheet (TBS) problems, which have been acclaimed worldwide. On the occasion of the 90th Foundation Day function of RBI, the honourable Finance Minister Nirmala Sitharaman rightly said that RBI could transform the twin balance sheet (TBS) problem into a twin balance sheet advantage. To resolve the TBS issue effectively, the RBI adopted a decentralised approach where banks were put in charge of the restructuring decisions. But in the current circumstances, effectiveness has proved elusive, as banks have simply been overwhelmed by the size of the problems confronting them. PARA (Public Sector Asset Rehabilitation Agency), also known as Bad Bank, was promoted by the RBI to address the issue of TBS. However, PARA has its own difficulties and risks, considering that the country’s history is not favourable to the public sector.

The inflation dynamic in a country like India has been posing a dilemma for the RBI in setting policy rates, balancing growth and financial stability, and currency considerations to ensure stable interest rates and liquidity. In this regard, incomplete transmission of monetary policy is an added challenge for the RBI, where easing in policy rates by the RBI has not been reflected in the lowering of banks’ lending rates. But at the same time, the RBI proved itself to be the pioneer in recognising the non-transient nature of inflation. Whether transient or non-transient, inflation in India has surged since the emergence of the COVID pandemic, and the subsequent Ukraine war has become a major policy concern. The government has already mandated the RBI to ensure consumer price index (CPI)-based inflation remains at 4% with a margin of 2% on either side. To exercise control over inflation, the Monetary Policy Committee (MPC) of the RBI convenes at least four times a year to appraise the economic landscape, including inflation and other growth metrics. Considering the level of inflation, the RBI takes either a contractionary or expansionary stance in the money supply using tools like the repo rate, reverse repo rate, liquidity adjustment facility, marginal standing facility, bank rate, cash reserve ratio, statutory liquidity ratio, open market operations, market stabilisation scheme, etc. But at the same time, to avoid overdependence on a single indicator of inflation, a broader measure of inflation objective, which includes the GDP deflator, wholesale price index, and CPI, is needed.

With technological advancements in the FinTech world and advancements in AI technology, the risks to consumers have also increased with increasing instances of fraud and data breaches. The RBI has been very cautious and is actively trying to make stakeholders aware of various preventive measures. Frauds like ‘Dark Patterns’ are designed to lure users into lucrative financial facilities, hiding their true nature. For example, high-cost short-term consumer credit is disguised as an instant loan. However, the active participation of the RBI along with the Indian Computer Emergency Response Team (CERT-In or ICERT) has reduced the rates of success of such crimes to a great extent. The RBI and CERT-In have collaborated on a cyber-security awareness initiative on the Digital India Platform, encouraging individuals to “beware and be aware of financial frauds.”

The foreign exchange reserve management policy, together with the exchange rate management and monetary policy of the RBI, have been able to create a conducive condition of a softer interest rate regime, which is advantageous for higher economic growth. Moreover, the recent policy initiatives have created an investment atmosphere where offshore investment complements domestic investment, which in the medium term would guarantee a higher growth trajectory. Even though intensifying the immersion of foreign capital is an important policy challenge for both the RBI and the government in the short run, in general, medium- to long-term policy-making demands that the current account deficit (CAD) be certainly maintained within a sustainable level.

It is agreeable that the RBI is continuously evaluating emerging trends and trying to take effective policy measures to remain in the loop of evolving domestic and global economic conditions. At a domestic level, it will be an injustice if the RBI’s role is not remembered when it deployed conventional and traditional ranges of instruments to provide liquidity to promote growth, and ensure financial stability. So it is easily recognisable that well-defined coordination between monetary and fiscal policy and better asset quality management and governance will help the RBI stand tall among its peers on several counts in the days to come.