RBI turns 90: Five points about the Indian Central Bank highlighted by Guv Shaktikanta Das

The need of the hour when the pandemic hit India was economic revival and so the MPC decided to look through the occasional bouts of inflation. The need of the hour when the pandemic hit India was economic revival and so the MPC decided to look through the occasional bouts of inflation.

The Reserve Bank of India (RBI) is celebrating 90 years today. The Reserve Bank of India Act, 1934 (II of 1934) governs the operations of this central bank, which started operations on April 1, 1935, under the leadership of Sir Osborne Smith.

Speaking on this occasion, RBI Governor Shaktikanta Das in an article to Times of India spoke about the central bank's journey through the Covid pandemic and other geopolitical crisis around the world in the last couple of years.

"Macroeconomic fundamentals of the Indian economy remain strong.  There’s been a sea change in global perceptions about India and its potential in the global economy," Das said.

Das further spoke about key characteristics of RBI on how it shined in the last few years:

Flexible and Prepared

Das said that even before the nation went under lockdown in March 2020, a bio bubble facility was created which comprised of 200 employees and service providers to ensure smooth operations of financial markets and payments systems. MPC reduced the policy repo rate by 115 basis points in two months (March-May 2020)

"A significant quantum of liquidity was infused through banks by  resorting to both conventional and unconventional measures to  stimulate the economy, restore confidence and revive market liquidity," Das further said.

RBI's balance sheet was not diluted as liquidity was provided through government securities.

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Judgement

The need of the hour when the pandemic hit India was economic revival and so the MPC decided to look through the occasional bouts of inflation.

"..but as soon as there were growing indications of a build-up  of generalised and persistent inflationary  pressures following the Ukraine war and adverse weather events MPC quickly changed gears by prioritising inflation over growth and raised policy rates by 250 bps between May 2022 and Feb 2023," Das added.

The correct stance of monetary policy, which changed from being accommodative to withdrawal of accommodation because of inflation expectations, helped bring down inflation from high levels in summer of 2022 and kept it on a path of disinflation of 4%, Das further said.

Other Measures Taken 

Measures like easing of risk weights, and loan to value ratio against certain category of loans were announced to ease stress from various segments of the financial sector. Most measures were offered for limited period.

Critical Reforms in the Regulatory and Supervisory Architecture

RBI's supervisory systems have adopted a unified and harmonised approach for regulated entities in the last few years. "Some key regulatory measures include issuance of comprehensive governance guidelines for commercial banks; scale-based regulatory framework for NBFCs revised regulatory framework for urban cooperative banks and digital lending guidelines," Das further wrote.

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In Sync and Effective Communication

Das said RBI's monetary and fiscal policies were in sync during the period of 'great volatility'. There was also effective communication to anchor market expectation, provide confidence and enhance credibility of RBI's policies. Foreign Exchange Reserves were built up as buffer against external stress. Das said, "Today, our forex reserves are at an all-time high."