Policy approach: How RBI is taking a selective and cautious stance

In the context of US elections and possible uncertainty, Mr Das said the Indian economy and the financial sector were well placed to deal with any spillover impact from global economy

Over the years, large central banks have worked on improving communications to avoid any misunderstanding or misinterpretation of policy by financial markets. The Reserve Bank of India (RBI) is no exception. In the context of monetary policy, besides the governor’s policy statement and the resolution of the Monetary Policy Committee (MPC), the deliberation and decision of the committee are explained at length in the media conference by the top leadership of the central bank, led by the governor.  Besides this, top officials also present the central bank’s position on various issues in their speeches and other public appearances. One such event in the Indian financial sector’s calendar is the Business Standard BFSI Insight Summit. In the inaugural session of this year’s edition on Wednesday, RBI Governor Shaktikanta Das spoke on various issues, which helped shape the financial markets’ understanding of the central bank’s position. 

In the context of the United States presidential elections and possible uncertainty, Mr Das said the Indian economy and the financial sector were well placed to deal with any spillover impact from the global economy.  It is worth noting that India has built large foreign exchange reserves, which will help tame excess volatility in the currency market. Indeed, the rupee remained relatively stable recently, to the point that some economists have suggested it needs to adjust more. While longer-term trade and growth outcomes depend on various factors, India will benefit by avoiding currency overvaluation. On this financial year’s growth outlook, while some high-frequency indicators and corporate commentary indicate softness in demand, the RBI remains optimistic. It expects the Indian economy to grow 7.2 per cent this financial year. Mr Das also reiterated the RBI’s position on inflation and interest rates and the fact that the policy stance was changed to give the MPC more flexibility. 

There are at least two other policy aspects worth discussing here. The first is the state of the central bank digital currency (CBDC). It was highlighted that the CBDC remained in the pilot stage and the RBI was in no hurry to push it. The central bank is ahead of several developed economies in testing CBDCs. As Mr Das highlighted, some banks have given loans to tenant farmers in the CBDC. Its programmability ensures that the money is used only for the intended purpose. The option of programming the CBDC could make it extremely useful, particularly in the context of direct benefit transfers, helping to further contain leakages. The central bank has done well not to rush the project because all aspects of the digital currency need to be carefully studied before increasing the scale of issuance. 

The other aspect touched upon was action against regulated entities. Mr Das clarified that the recent action against some non-banking financial companies (NBFCs) was selective and taken after extensive bilateral discussion. He also noted if the regulator was confident that corrective action had been taken, the restriction could be withdrawn. There have been cases where the reported conduct of NBFCs, particularly microfinance companies, was not as desired. There are also reports of some stress building in this segment. Thus, it’s appropriate for the regulator to act pre-emptively and address the issue.  At a broader level, the RBI has put constraints on credit extended by banks and NBFCs to the household sector. Overall, while the Indian financial sector is in a strong position, growth outcomes will, to some extent, be influenced by how policymakers deal with the uncertainty emanating from the world’s two largest economies.