From changes in payment mechanisms, and the central bank digital currency, to new sources of risk and ensuring effective regulation and supervision, the central bank must be ready for unforeseen events
By: Editorial
April 2, 2024
While central banks in developed countries can be traced as far back as the 17th century, among developing countries, the Reserve Bank of India, established on April 1, 1935, is one of the oldest such institutions. The RBI, as Prime Minister Narendra Modi pointed out at the opening ceremony of RBI@90 in Mumbai, has witnessed both the pre- and post-Independence eras.
Since it came into existence, it has navigated and managed the several transitions the country has undergone — from a time when the planning process held sway to a more market-oriented economy, and now an increasingly digital economy. As it looks towards the next 10 years, the RBI must learn from its past, adjust and adapt, and plan for the challenges it could encounter on its journey towards its centenary.
In the past nine decades, the Indian economy and the RBI have faced many difficult moments. In the more recent past, these include the global financial crisis of 2008, the taper tantrum of 2013, demonetisation, and the pandemic induced disruptions to economic activities. There was also the issue of bad loans plaguing the banking sector. This problem, as the prime minister noted, was tackled by authorities at multiple levels — recognition, resolution and recapitalisation.
Prodded by the RBI, banks began to recognise the true extent of the problem. The IBC framework ushered in by the government provided a more effective mechanism for resolving bad loans. Alongside, the government infused capital in public sector banks. As a consequence, bad loans fell from 11.25 per cent in 2018 to below 3 per cent by September 2023, and credit growth has been healthy. The twin balance sheet problem that held back investment activity has been resolved, the PM said.
There have been other significant changes in recent times. For one, the central bank has formally adopted inflation targeting. This has helped keep inflation in line with the target and anchor expectations, barring some periods marked by the pandemic induced disruptions. The introduction of UPI has revolutionised the payments ecosystem across the country.
Over the coming years, as the pace of change accelerates further, the central bank must prepare for the many challenges that may come before it — from dealing with changes in payment mechanisms, and the central bank digital currency, to new sources of risk and ensuring effective regulation and supervision. It must also be mindful of the risks of unforeseen events.
An independent central bank plays a critical role in the macroeconomic management of the country. Coordination between monetary and fiscal policies is critical for the economy, and for creating a “Viksit Bharat”.
