Basel III's impact on GDP seen as a temporary phenomena

If Basel III is fully phased in 35 quarters the Gross Domestic Product (GDP) growth will dip by 0.22% over 35 quarters, said Reserve Bank of India (RBI) deputy governor Anand Sinha mentioning about at a study done by Basel Committee. However, according to Sinha after this period is over the growth path will shift back to the original trend path.

Speaking at the the Financial Times-Yes Bank organised banking summit Sinha said the pursuit of financial stability has costs in terms of growth. “The concern that is often voiced is that the capital buffer on the back of much higher level of equity required in the capital structure as per Basel III would leave banks with substantially lower return on equity and it would become difficult to retain investor's interest rendering capital raising difficult,” said Sinha.

 

But Sinha also said that as regards to investors interest due to lower return on equity, it is argued that with lower leverage banks would be much safer and hence investors would demand a lower return. “Moreover, lower leverage would make the returns on banking stocks much less volatile and studies in many case show that the average return on equity in various segments over a longer period are in the same range,” said Sinha.

It is thus expected that the trade-off from the pursuit of financial stability in Basel framework would be a manageable cost in terms of growth and that investors interest in banking stocks would possibly be retained, Sinha said.

According to Sinha the monetary policy also has a larger role to play. "The monetary policy has an expanded objective, it has a larger role than simple inflation targeting," Sinha said. According to Sinha the central bankers now think that financial imbalances will also have to be considered before finalising the monetary policy.

Calling for a closer coordination between the monetary and fiscal policies, Sinha said if they do not work in tandem, the economy will suffer.