Context: The RBI (Reserve Bank of India) role amidst the COVID 19 pandemic and subsequent lockdown involves trade offs rather than conflicts.
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- Amartya Sen believes that the word ‘why’ is key to the working of the central bank.
- A central bank like the RBI must replace intellectual certainty with continuous debate about Why because their job involves complex trade-offs — next quarter vs quarter century, growth vs stability, and mandates vs expectations.
- These trade-offs become more complex in a global anthropological shock like situation i.e COVID 19.
- The RBI must remember three things — acting prudently to balance the next quarter and quarter century, acting flexibly to blunt this economic calamity, and acting within their mandate to ensure institutional legitimacy and immunity.
- The coronavirus is a human tragedy but a central bank must not act like a commercial bank because that would compromise the balance between today and tomorrow.
- A self-admiration— bordering on self— already reflects in global debt levels that steal from our grandchildren. More importantly, India doesn’t have the economic strength
- to copy the US Federal Reserve’s $2.3 trillion offer to lend to businesses of all sizes and sorts, run anything close to this year’s expected US fiscal deficit of 15 percent of GDP, or
- sustain Japan’s public debt levels at 240 percent of GDP.
- RBI must remember that we all are in the same storm but we are all not in the same boat.
Acting flexibly to blunt this economic calamity:
- Handling the inevitable tensions between the RBI’s dual mandate of growth and stability requires continuous work.
- Balancing inflation and other indicators is required as inflation’s secular decline has many parents, some economic models are useful but all are incomplete.
- The fog of war involves making second best choices as long as they are reversible, proportional, and accountable.
- Central banks often undertake liquidity management while leaving policy rates unchanged; this is not a conspiracy to undermine the MPC or its interest rate corridor, rather are a pragmatic encouragement for banks to lend to clients rather than lend Rs 7 lakh crore to the RBI.
- Other virus flexibility includes repayment moratoriums, bad loan accounting forbearance and bank windows for NBFC/Mutual Fund liquidity.
Acting within mandate:
- Central bank governance is a fine balance; they function best when they don’t declare poorna swaraj from the government and they aren’t considered a part of the finance ministry.
- History suggests technocratic central banks run by unelected officials amplify institutional vulnerability by wading into democratic politics.
- The messy, slow and clunky process involves conciliation, compromise, and squeezing collective decisions out of conflicting demands.
- The RBI must build on its track record of wisely balancing the trade-offs between depositors vs borrowers, companies vs banks, and stability vs growth.
- And it must continue to stay out of the government’s domain.
Role of Central Banks to tackle COVID 19:
- The central bank crisis role debate is skewed by the great book, Lords of Finance, by Liaquat Ahamed that shows how central bankers of the 1920s failed to fight the Great Depression.
- History matters but nobody knows if this is the beginning or ending of the virus.
- Yet the global central bank COVID toolbox has been substantial;
- buying corporate bonds, making corporate loans, cutting interest rates, conducting open market operations, and reducing reserve ratios.
- Additionally, banks have been permitted to grant loan moratoriums, hold less capital, restructure loans, pay lower deposit insurance premiums and delay bad loan recognition.
- RBI has also taken the above mentioned steps but their effectiveness gets constrained by pre-existing conditions in Indian banking;
- Bad loans - peaked at Rs 14 lakh crore but still large.
- inadequate competition - scheduled commercial bank numbers have hovered between 90 and 100 since 1947.
- Private bank governance - CEO so powerful that boards and shareholders are weak.
- Public sector bank governance - shareholder so powerful that boards and CEOs are weak.
- The RBI’s own game - process, technology and human capital in regulation and supervision.
- The true antidote to fear is hope.
- Another fiscal package may come soon. But supplementing India’s fiscal and monetary policy interventions by announcing two bold reform plans -
- 90-day flick-of-pen - Can be implemented quickly like conversion of mandatory contribution under EPF to voluntary so as to augment disposal income, introducing single window clearance for left out services etc..
- one-year structural - Requires time and focus on structural changes like development of a sector or denial of some sectors in the economic mix.
- Both will help tackle overdue reforms in labour, education, cities, finance, compliance, and civil services and will catalyse hope among employers, employees, banks, and overseas investors.
- The emergency authority under Section 13 of the US Federal Reserve Act being used by it also exists in Section 18 of the RBI Act.
- But emergency powers are a last resort and depends on the recovery being V-shaped, U-shaped, or Bathtub-shaped which can be modelled only after the lockdown.
- Creating a prosperous India needs many things. One of them is an independent, accountable, and boundaried central bank that listens.
- Further listening is hardly a compromise especially if accompanied by a will to unwind liquidity, asymmetry and forbearance when the planet’s gap year ends.
Image Source:Indian Express