Financial instability brings bigger long-run consequences than any short-term gains, says RBI Governor

RBI Governor Sanjay Malhotra

The Reserve Bank of India (RBI) Governor Sanjay Malhotra on November 20 said that financial instability can have much bigger consequences for the long run, they can have much more losses than the gains achieved due to the short term.

“We do realize that short term growth can be achieved at the cost of financial stability, but financial instability can have much bigger consequences for the long run, they can have much more losses than the gains achieved due to the short term,” Malhotra said while addressing at the VKRV Rao Memorial Lecture in Delhi.

He added that while financial stability remains the bedrock, there are few other objectives such as prudential aspects of liquidity and capital requirements to ensure the safety and the soundness of financial operation in the interest of all the stakeholders, which may or may not have financial stability implications.

Secondly, conduct related measures for consumer protection, assistance in law enforcement, for example, money laundering, and that's an issue which has engaged our attention, he added.

Governor said that the central bank have hybrid approach. “What we have done is that we are gradually moving towards a principle-based regulation approach, but retaining some of the rules that are already there.”

Rule based regulation uses specific statements to define requirements that entities must meet. These necessarily focus on specific areas, and tend to use quantitative terms, he added.

“While regulations do offer benefits in terms of stability, consumer, interest, etc, they come with a cost. We got to recognize that while you know, it is in our interest to promote consumer protection, to promote financial stability, but like you know, there are no free lunches,” Malhotra said.

On the Indian rupee front, governor said that the central bank do not target any levels for the local currency and current depreciation is due to uncertainty due to trade leading to rise in demand for dollars.

“We are confident that there will be good trade deal and that should release pressure on current account. We have good buffers of forex reserves,” Malhotra said.