Introduction
- Reserve Bank of India (RBI) is India’s Central bank. It plays multi-facet role by executing multiple functions such as overseeing monetary policy, issuing currency, managing foreign exchange, working as a bank of government.
- Before inflation targeting was formally introduced in 2016, RBI was doing multiple roles. They were responsible for growth by managing liquidity as well as interest rates.
- They also took care of the financial system’s stability by supervising banks and NBFCs.
- Nobel laureate Joseph Stiglitz made a statement that if RBI Governor was the governor of the US Fed then the sub-prime crisis would not have occurred.
- The RBI plays a vital role in economic growth of the country and maintaining price stability.
- A six-member Monetary Policy Committee, headed by RBI Governor, decides the benchmark repo rate.
- RBI acts as a banker for both the central as well as state governments.
Multiple roles:
- That extraordinary performance made RBI the go-to-organisation for the government for multiple requirements which were inherently conflicting in nature.
- Somewhere the adage “don’t repair what ain’t broken” was missed and we shifted to specialisation for RBI. It was like asking Kapil Dev to only bowl rather than contribute with all his talent since Malcom Marshal was a successful bowler.
- Post 2016, RBI has been mandated to manage inflation and growth in that order of priority. We copied this idea from the developed economies where this idea has been put into cold storage when required.
- ECB inherited inflation hawkishness from German Central Bank. During the PIGS (Portugal, Italy, Greece and Spain) crisis, caution was thrown to the wind and trillions of dollars worth of liquidity was pumped in at near zero to negative interest rates to support the euro.
- During the subprime crisis of 2008, the US Fed pumped trillions of dollars worth of liquidity at near zero interest rates to support the crashing US financial system.
- Bank of Japan has been doing the job of supporting the economy with more than ample liquidity and near-zero interest rates since the ’90s.
- What was told to Asian nations in the 1997 Asian crisis was conveniently forgotten by the western world in 2008 as well as in 2013
Inflation Control
- RBI was constitutionally mandated in 2016 to bring inflation around 4% with a leeway of 2 % on both sides.
- They have successfully brought down the menace of inflation.
- It is important to not only bring down inflation but also inflationary expectations.
- Indians, who are used to double-digit inflation for years, need to see inflation in lower single digit for sufficient period of time to get convinced.
- RBI has maintained tighter liquidity and higher real interest rates to control inflation as well as inflationary expectations and started convincing Indians at large
What is way forward
- RBI has been mandated to manage inflation and growth in that order of priority.
- They have won the war on inflation and are in the process of winning the war on inflationary expectations.
- However, there is a price to be paid for the same in terms of below-potential growth.
- What we require at this point of time is the old RBI that is an all-rounder rather than a specialist.
- They have to manage multiple roles.
- They have to manage inherently conflicting issues like inflation, growth, rupee and financial system stability.
