Category: Speeches

Ladies and Gentlemen. Warm Greetings. At the outset, let me thank India International Centre for hosting this very important session on building a resilient financial system, when the resilience of the society itself is being tested by the Covid-19 pandemic. At a broader level, resilience is defined as the ability of a system, community or society exposed to hazards to resist, absorb, accommodate to and recover from the effects of a hazard in a timely and efficient manner, including through the preservation and restoration of its essential basic structures and functionsⁱ. I am confident that, we, as a country, will resist, absorb, accommodate to, and recover from the effects of Covid-19 very soon.

Meaning of Resilience of Financial System

In the context of financial system, a resilient financial system is one which is able to absorb the impact of endogenous shocks it is exposed to, rebound quickly to the original condition or adapt to new environment, and continue to perform its role of providing financial services. This definition of resilient financial system is different from a stable financial system. A stable financial system is one which is able to absorb shocks, whereas a resilient financial system will be able to adapt and reconfigure itself in response to a shock, in addition to absorbing itⁱⁱ. To put it simply,

“..a robust system will be one designed to withstand a once in 100-year event for example, an approach used in risk management. In contrast resilience makes no assumptions about the magnitude of possible shocks, but rather looks to build systems that can deal with the entire range of shocks…..”ⁱⁱⁱ

As such, our efforts should be focussed on building a financial system which is not just stable, but also resilient, as the type, source, magnitude and frequency of shocks are turning out to be highly unpredictable and non-measurable to a significant degree. Accordingly, focus of regulation and supervision of financial system should be to make sure that financial system as well as individual financial institutions are not just able to absorb the shocks, but are able to adapt to the changed circumstances.

Now, I would like to discuss some of the critical behavioural/cultural issues which, if handled appropriately, have the potential to tremendously improve the resilience.

Moral Hazard and Resilience

Moral hazard, rather absence of moral hazard, plays a substantial role in building a resilient financial system. Why would a bank invest in building a robust risk management system if it is aware that when push comes to shove, taxpayers’ money would be used to rescue them. Shareholders of a bank will have incentive to seek better governance and risk management capabilities from the management of the bank only if their investments are at risk. Privatisation of profits and socialisation of losses is antithetical for building a resilient financial system. Similarly, employees of a bank should also have skin in the game.

Resilience is a Collective Effort

Building a resilient financial system is a collective effort and cannot be left to regulators alone. While the regulators contribute majorly by framing appropriate regulations, a tick box approach to risk management by the banks would mean that the market’s wisdom is replaced with regulator’s wisdom. Regulations provide for minimum requirements to be met by all regulated entities. Hence, a resilient financial system requires contribution from all stakeholders and market discipline (i.e., disciplining by depositors, disciplining by borrowers and disciplining by investors) is a necessary condition to achieve a resilient financial system.

Lemon Problem – Information Asymmetry

Another important feature of building resilience in the financial system and improving the credit flow is reducing the incidence of ‘lemon problem’, which would require improvement in governance at the borrower level also. If the lender cannot distinguish between the borrowers of good quality and bad quality (the lemons), he will only make the loan at an interest rate that reflects the average quality of the good and bad borrowers. The result is that high-quality borrowers will be paying a higher interest rate than they should because low-quality borrowers pay a lower interest rate than they should. One result of this lemons problem is that some high-quality borrowers may drop out of the market, with what would have been profitable investment projects not being undertaken^iv. The ‘lemons problem’ also impedes banks’ ability to anticipate risk build-up in their portfolios. Borrowers are probably the first ones to see early signs of difficulties in their respective segment. When they do not pass on the information to their lenders fearing that the lender may refuse new loans or tighten the conditions of existing loans, lenders ability to identify risks early is severely hampered.

Tools to Ensure Resilience

Having explained the concept of resilience, let me delve into the tools required to achieve resilience in the financial system. The 3As model of resilience, though originally conceptualised in the context of climate change and disaster management, provides a useful template. The 3As of resilience are: Anticipatory Capacity, Absorptive Capacity and Adaptive Capacity^v. Anticipatory Capacity could be thought of as the ability of the financial system and its constituents to identify and measure emerging risks as early as possible and mitigate the risks by taking corrective actions. Absorptive Capacity is the ability to withstand the losses which may arise due to shocks and cannot be mitigated or avoided. Adaptive Capacity helps in adjusting to the new realities, be it changed regulatory/economic conditions or a new competitive landscape.

Dimensions of Resilience

Resilience of the financial system can be tested from many dimensions, viz., financial risks, operational and technological risks, competitive risks, climate risks etc., and the financial system is required to anticipate, absorb and adapt to the same.

Financial Resilience

The ability of banks to anticipate and absorb financial losses during a crisis after crisis remain solvent and retain their ability to lend is a measure of financial resilience. The Reserve Bank strives to ensure financial resilience of the institutions that are regulated by it by prescribing a set of micro-prudential regulations, viz., minimum capital requirements, provisioning norms for bad debts, liquidity norms, etc. Additionally, the Reserve Bank also resorts to macro-prudential measures when there is a system level risk build-up, which may not be fully captured by the micro-prudential regulations aimed at resilience of individual institutions.

While the prudential norms are aimed at improving the absorptive capacity of the individual institutions as well as the financial system as a whole, the anticipatory capacity of the banks requires to be strengthened by improving the risk governance in banks. The risk management function of financial institutions requires strengthening to be able to identify risks early and measure them with reasonable accuracy. It is important that the risk assessment process should include ongoing analysis of existing risks as well as the identification of new or emerging risks, as risks faced by financial system changing^vi. Banks, which are able to anticipate risk ahead of others, will also be able to raise capital ahead of others when the cost of raising such capital is low. Further, banks with superior risk identification capacity may be able to better recalibrate their capital requirements and put capital to use in a more efficient manner.

In addition to identifying current and emerging risks, financial entities should also perform stress tests to quantify their risk under various severe but plausible scenarios. The stress test should feed into their decision-making process in terms of potential actions like risk mitigation techniques, contingency plans, capital and liquidity management in stressed conditions, etc.

While the anticipatory and absorptive capacity of individual financial institutions enhance their resilience, at the system level, the Reserve Bank has also enhanced its own anticipatory capacity by improving its supervisory process.

Operational and Technological Resilience

The Covid-19 spread and the public health responses to the pandemic, including the social distancing and lock-down measures, tested the operational and technological resilience of the financial system like never before. However, it’s a matter of great satisfaction that both the Reserve Bank and the financial institutions demonstrated tremendous operational resilience and ensured uninterrupted availability of financial services to the general public by putting in business continuity plans. The Reserve Bank ensured that payment systems were functioning normally and also monitored the availability of digital banking channels on daily basis.

Another equally important development, though not as sudden as the pandemic, that of growing reliance of financial institutions on technology. Resilience is now regarded as important as financial resilience, if not more important.

Even prior to the pandemic, the Reserve Bank has been focussing on ensuring cyber resilience of financial institutions. The Reserve Bank determines the cyber risk score for each bank using various key cyber risk indicators. The Reserve Bank has issued various instructions, viz., cyber security frameworks, cyber security controls for third party ATM switch providers, Reserve Bank of India (Digital Payment Security Controls) Directions 2021, aimed at improving cyber resilience of the system. In order to enhance the ability of top management of banks to appreciate the issues surrounding cyber resilience, certification / awareness program on cyber security was mandated for Board functionaries, Senior Management and of banks.

Competitive Resilience

Even as banks’ reliance on technology has grown by leaps and bounds, technology is also revolutionising the competitive landscape in financial system. Entry of BigTech firms and innovative Fintech players into the traditional domain of banks has already revolutionised the way financial transactions are carried out. Unbundling of banking services is a reality and will change the way banks operate. This will test the adaptive capacity of banks and other traditional financial firms. Unless traditional firms adapt to new ways of doing business, they may be marginalised very soon.

However, even while individual entities adapt to the new competitive landscape, at the system level it is imperative to ensure that heterogeneity is preserved. A homogenous financial system will be less resilient and prone to systemic crisis if the underlying economic conditions change. Hence, it is important that the financial system consists of entities which follow different business models even while adapting to the newer ways of doing business.

Climate Resilience

Climate is fast emerging as a key risk driver for financial system. While insurance companies directly face the climate risk, banks are also required to take into account the climate risk more seriously. Climate risks can impact the financial sector through two broad channels, viz., physical risks (arising from specific weather events and long-term climate change) and transition risks (emanating from the efforts taken to address the climate change). The fallout could include deterioration of asset quality of borrowers in affected geographical zones; the impact on business models due to governmental/societal response to climate change; and long-term liquidity effects^vii.

Increased frequency of natural disasters and climate extremes have a direct impact on the operational resilience of banks, especially in the context of increased reliance on centralised technology platforms and data centres. There is a constant need to assess the climate risk and mitigate the same. In addition to mitigating operational risks arising out of climate extremes, there is a need for the financial system to move towards green financing, even while keeping in mind the developmental requirement of the country.

Resilience and Governance

In my view, what lies at the core of these three capacities (anticipatory capacity, absorptive capacity and adaptive capacity), which enhance the resilience of an entity, is a good governance framework. More often than not, excessive risk exposures, credit losses, liquidity problems and capital shortfalls stem from weaknesses in corporate governance, compensation policies and internal control systems^viii. While high-quality governance acts as a credible defense against risks, past experience suggests that weakness in corporate governance can cause failure of a financial system and may lead to financial instability. Several enquiries and studies have concluded that one of the significant reasons behind the Global Financial Crisis of 2007-09 was that of weaknesses in corporate governance at financial institutions. The world also witnessed failure of governance structures, which necessitated the overhaul of interest rate benchmark setting process. Given that the sources of future vulnerabilities are hard to predict, banks need to have robust frameworks of risk governance and management to identify and understand emerging risks and their potential impact on the firm. This remains one of the most important factors for bank resilience, given the ongoing changes in business lines, market practice, and financial technology that may test banks’ governance and risk management^ix.

Further, corporate governance is increasingly a major factor in the investment decision-making process. Poor corporate governance is often cited as one of the main reasons why investors are reluctant, or unwilling, to invest in companies in certain markets. It can also explain why, in some economies, the shares of many companies trade at a significant discount to their true value. Even better governed companies are “tarred with the same brush” almost a case of guilt by association^x. As such, banks’ ability to raise capital, which is important to improve their absorptive capacity, is also a function of strength of its corporate governance practices.

Good corporate governance in financial intermediaries is also an important determinant of efficiency in allocation of resources and protection of stakeholders’ interest (depositors, other customers, shareholders, etc.).

Governance quality depends substantially on two elements – governance structures and culture. While it is possible for the Government or The Reserve Bank to enact laws/regulations to prescribe governance structures within a bank, appropriate culture is something that cannot be legislated. Banks and the Boards have to develop the desired culture within the organisations. A sound risk culture bolsters effective risk management, promotes sound risk-taking, and ensures that emerging risks or risk-taking activities are recognised, assessed, escalated and addressed in a timely manner^xi. While culture influences the decision making within an organisation, it is hard to assess. Nevertheless, a structured framework should be put in place to assess the risk culture within banks and incorporate the assessment into the supervisory rating of the banks. The focus is on the bank’s norms, attitudes and behaviours related to risk awareness, risk taking and risk management^xii.

Another important element of governance framework, which has significant effect on resilience of financial institutions, is the compensation policies. A compensation structure, which rewards short term risk taking, without consideration for long term risk or negative externalities, may endanger the resilience of the individual institutions as well as the systemic resilience.

At the same time, inadequate compensation also has the effect of not sufficiently incentivising the top/senior management of financial institutions in developing the capacity of the financial institution to anticipate, absorb and adapt to various shocks faced by the financial institutions.

To conclude, it may not be an overstatement to say that financial systems in India and other jurisdictions are witnessing rapid shifts in the operating environment, characterised by changing competitive landscape, automation and increasing regulatory/supervisory expectations. The source, nature, frequency and magnitude of risks are also continuously changing. The Reserve Bank has put in place various regulations to improve the governance in banks and make them more resilient. In addition, banks have also made improvements in their risk management capacities. Yet, the changing operating and risk environment requires banks to be vigilant, strong and agile so as to identify risks early, absorb the shocks and be able to adapt to the newer ground realities. I am hopeful that banks and other financial institutions in India will rise to the challenge, continue to demonstrate their resilience and be able to contribute to a 5 trillion economy and beyond.

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April 14, 2015

Dear All

Welcome to the refurbished site of the Reserve Bank of India.

The two most important features of the site are: One, in addition to the default site, the refurbished site also has all the information bifurcated functionwise; two, a much improved search – well, at least we think so but you be the judge.

With this makeover, we also take a small step into social media. We will now use Twitter (albeit one way) to send out alerts on the announcements we make and YouTube to place in public domain our press conferences, interviews of our top management, events, such as, town halls and of course, some films aimed at consumer literacy.

The site can be accessed through most browsers and devices; it also meets accessibility standards.

Please save the url of the refurbished site in your favourites as we will give up the existing site shortly and register or re-register yourselves for receiving RSS feeds for uninterrupted alerts from the Reserve Bank.

Do feel free to give us your feedback by clicking on the feedback button on the right hand corner of the refurbished site.

Thank you for your continued support.

Department of Communication

Reserve Bank of India

Next

Introduction

The idea of “Central Bank Digital Currencies” (CBDC) is not a recent development. Some attribute the origins of CBDCs to Nobel laureate James Tobin², an American economist, who in 1980s suggested that that Federal Reserve Banks in the United States could make available to the public a widely accessible ‘medium with the convenience of deposits and the safety of currency.’ It is only in the last decade, however, that the concept of digital currency has been widely discussed by central banks, economists & governments.

2. Except as currency notes, all other use of paper in the modern financial system, be it as bonds, securities, transactions, communications, correspondences or messaging – has now been replaced by their corresponding digital and electronic versions. On anecdotal evidence, use of physical cash in transactions too has been on the decline in recent years, a trend further reinforced by the ongoing Covid19 pandemic. These developments have resulted in many central banks and governments stepping up efforts towards exploring a digital version of fiat currency. Some of this interest among central banks has been indigenous in nature for pursuing specific policy objectives – for example, facilitate negative interest rate monetary policy. Another driver is to provide the public with virtual currencies, that carry the legitimate benefits of private virtual currencies while avoiding the damaging social and economic consequences of private currencies.

What is a CBDC?

3. It is important to understand and appreciate what precisely is a CBDC, and to do that one needs to understand what a currency is and what money is.

What is a currency?

4. Let us start with money. As societies developed from hunters and gatherers material needs increased – to build a house, wear clothes, make weapons and implements etc. Since these needs could not be produced individually, people had to purchase them from others. These purchases were paid initially by barter – a leather skin cloak for a spear, maybe. As barter had its limits – how many cloaks for a spear – barter got standardized in terms of metals or cowrie shells. Now people knew the value of both the cloak and the spear in terms of bronze or cowrie shells. This was still barter, as both bronze and shells had intrinsic value (shells were desired for their beauty). This system evolved over time into metal currencies. Gold and silver coinage were the offshoot of this system where they had features of barter (both gold and silver had intrinsic value) as well as money (they were standardized representation of value). Somewhere along the way people improvised – instead of actual goods for barter they started using claims on goods, a bill of exchange in fact. These could be clay tablets in Mesopotamia or, as in China in the eleventh century, paper currency.

5. In respect of money two facts emerge historically.

1. Money has taken the form of either commodities (which have intrinsic value) or in terms of debt instruments. When money does not have intrinsic value, it must represent title to commodities that have intrinsic value or title to other debt instruments. Paper currency is such a representative money and it is essentially a debt instrument. The owner of the currency knows who owes him or who has the underlying liability. There is always an ISSUER of representative money.

2. Money is usually issued by a sovereign. Private issuance of money – whether under sovereign license or otherwise – has existed in the past but has over time given way to sovereign issuance, for two reasons. Firstly, being a debt issuance, private money is only as good as the credit of the issuer. By definition, there can be multiple issuers. This makes private currency unstable. On the other hand, public currency, as it is backed by a sovereign, is unique to an economy and has better credit standing; therefore, it is more stable. Secondly, paper currency involves seignorage – the difference between the intrinsic value and the representative value which accrues to the issuer. This seignorage should not accrue to any private individual. It should accrue to the Government and thus used for public spending.

6. Now we are in a position to provide a definition of a currency. In modern economies, currency is a form of money that is issued exclusively by the sovereign (or a central bank as its representative). It is a liability of the issuing central bank (and sovereign) and an asset of the holding public. Currency is fiat, it is legal tender. Currency is usually issued in paper (or polymer) form, but the form of currency is not its defining characteristic.

What is a central bank digital currency?

7. Having defined a currency as a liability issued by the central bank, we are now in a position to define a CBDC. A CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.

8. It is also important to understand what a CBDC is not. CBDC is a digital or virtual currency but it is not comparable to the private virtual currencies that have mushroomed over the last decade. Private virtual currencies sit at substantial odds to the historical concept of money. They are not commodities or claims on commodities as they have no intrinsic value; some claims that they are akin to gold clearly seem opportunistic. Usually, certainly for the most popular ones now, they do not represent any person’s debt or liabilities. There is no ISSUER. They are not money (certainly not CURRENCY) as the word has come to be understood historically.

9. A line of argument that has helped private virtual currencies gain some degree of legitimacy is that most money in modern societies is in fact already private since they represent deposit liabilities of private banks. There are two factors that are conveniently pushed under the carpet. One, deposits are issued by banks under license of the sovereign issuer of currency (usually the central bank). Two, deposits are accepted by the public only because they are convertible one-to-one into sovereign currency. A simple way to understand the distinction is to look at deposits as lending of sovereign currency to banks by the public, on interest (credit, its opposite side, is lending of sovereign currency by banks to the public, on interest). Bank deposits are money, certainly, but they have no independent existence as money, shorn of sovereign authority and the resultant public confidence. In any case bank deposits are very different from private currencies which (a) do not have an issuer, and (b) are not convertible one-to-one into the sovereign currency.

10. To sum up, CBDC is the same as currency issued by a central bank but takes a different form than paper (or polymer). It is sovereign currency in an electronic form and it would appear as liability (currency in circulation) on a central bank’s balance sheet. The underlying technology, form and use of a CBDC can be moulded for specific requirements. CBDCs should be exchangeable at par with cash.

What is the need for a CBDC?

11. While interest in CBDCs is near universal now, very few countries have reached even the pilot stage of launching their CBDCs. A 2021 BIS survey of central banks found that 86% were actively researching the potential for CBDCs, 60% were experimenting with the technology and 14% were deploying pilot projects. Why this sudden interest? The adoption of CBDC has been justified for the following reasons:-

1. Central banks, faced with dwindling usage of paper currency, seek to popularize a more acceptable electronic form of currency (like Sweden);

2. Jurisdictions with significant physical cash usage seeking to make issuance more efficient (like Denmark, Germany, or Japan or even the US);

3. Central banks seek to meet the public’s need for digital currencies, manifested in the increasing use of private virtual currencies, and thereby avoid the more damaging consequences of such private currencies.

12. In addition, CBDCs have some clear advantages over other digital payments systems – payments using CBDCs are final and thus reduce settlement risk in the financial system. Imagine a UPI system where CBDC is transacted instead of bank balances, as if cash is handed over – the need for interbank settlement disappears. CBDCs would also potentially enable a more real-time and cost-effective globalization of payment systems. It is conceivable for an Indian importer to pay its American exporter on a real time basis in digital Dollars, without the need of an intermediary. This transaction would be final, as if cash dollars are handed over, and would not even require that the US Federal Reserve system is open for settlement. Time zone difference would no longer matter in currency settlements – there would be no ‘Herstatt’ risk.

Do we need CBDC in India?

13. The advantages of issuing a CBDC discussed briefly in the previous paragraph might be enough to justify India issuing a CBDC, although to realize benefits of global settlements, it is important that both the countries in a currency transaction have CBDCs in place. Let us, however, look at it from India’s own point of view.

14. India is leading the world in terms of digital payments innovations. Its payment systems are available 24X7, available to both retail and wholesale customers, they are largely real-time, the cost of transaction is perhaps the lowest in the world, users have an impressive menu of options for doing transactions and digital payments have grown at an impressive CAGR of 55% (over the last five years). It would be difficult to find another payment system like UPI that allows a transaction of one Rupee. With such an impressive progress of digitisation, is there a case for CBDCs?

15. A pilot survey conducted by the Reserve Bank on retail payment habits of individuals in six cities between December 2018 and January 2019, results of which were published in April, 2021 RBI Bulletin (please see charts below) indicates that cash remains the preferred mode of payment and for receiving money for regular expenses. For small value transactions (with amount up to ₹500) cash is used predominantly.

16. There is thus a unique scenario of increasing proliferation of digital payments in the country coupled with sustained interest in cash usage, especially for small value transactions. To the extent the preference for cash represents a discomfort for digital modes of payment, CBDC is unlikely to replace such cash usage. But preference for cash for its anonymity, for instance, can be redirected to acceptance of CBDC, as long as anonymity is assured.

17. India’s high currency to GDP ratio holds out another benefit of CBDCs. To the extent large cash usage can be replaced by CBDCs, the cost of printing, transporting, storing and distributing currency can be reduced.

18. The advent of private virtual currencies (VCs) may well be another reason why CBDCs might become necessary. It is not clear what specific need is met by these private VCs that official money cannot meet as efficiently, but that may in itself not come in the way of their adoption. If these VCs gain recognition, national currencies with limited convertibility are likely to come under threat. To be sure, freely convertible currencies like the US Dollar may not be affected as most of these VCs are denominated in US Dollar. In fact, these VCs might encourage the use of US Dollar, as has been argued by Randal Quarles³. Developing our own CBDC could provide the public with uses that any private VC can provide and to that extent might retain public preference for the Rupee. It could also protect the public from the abnormal level of volatility some of these VCs experience. Indeed, this could be the key factor nudging central banks from considering CBDCs as a secure and stable form of digital money. As Christine Lagarde, President of the ECB has mentioned in the BIS Annual Report “… central banks have a duty to safeguard people’s trust in our money. Central banks must complement their domestic efforts with close cooperation to guide the exploration of central bank digital currencies to identify reliable principles and encourage innovation.”

19. The case for CBDC for emerging economies is thus clear – CBDCs are desirable not just for the benefits they create in payments systems, but also might be necessary to protect the general public in an environment of volatile private VCs.

CBDC and the Banking System

20. CBDCs, depending on the extent of its use, can cause a reduction in the transaction demand for bank deposits. Since transactions in CBDCs reduce settlement risk as well, they reduce the liquidity needs for settlement of transactions (such as intra-day liquidity). In addition, by providing a genuinely risk-free alternative to bank deposits, they could cause a shift away from bank deposits which in turn might reduce the need for government guarantees on deposits (Dyson and Hodgson, 2016).

21. At the same time reduced disintermediation of banks carries its own risks. If banks begin to lose deposits over time, their ability for credit creation gets constrained. Since central banks cannot provide credit to the private sector, the impact on the role of bank credit needs to be well understood. Plus, as banks lose significant volume of low-cost transaction deposits their interest margin might come under stress leading to an increase in cost of credit. Thus, potential costs of disintermediation mean it is important to design and implement CBDC in a way that makes the demand for CBDC, vis‑à‑vis bank deposits, manageable.

22. There is another risk of CBDCs that could be material. Availability of CBDC makes it easy for depositors to withdraw balances if there is stress on any bank. Flight of deposits can be much faster compared to cash withdrawal. On the other hand, just the availability of CBDCs might reduce panic ‘runs’ since depositors have knowledge that they can withdraw quickly. One consequence could be that banks would be motivated to hold a larger level of liquidity which could result in lower returns for commercial banks.

23. In actual fact, notwithstanding the benefits of CBDCs vis-à-vis bank deposits, since CBDCs are currency and therefore do not pay interest, their impact on bank deposits may actually be rather limited. Depositors that require CBDCs for transactional purposes are likely to sweep day end balances to interest-earning deposit accounts.

CBDC and Monetary Policy

24. CBDCs may bring about a change in the behaviour of the holding public. And what the nature of that change would be cannot be gauged a priori given that no central bank has launched CBDC. If there is overwhelming demand for CBDC, and CBDCs are issued largely through the banking system, as is likely, more liquidity may need to be injected to offset the currency leakage from the banking system.

25. Much recent discussion has focussed on the use of negative interest-bearing CBDCs for effectiveness of monetary policy, for a specific reason. The extremely low inflationary environment in many advanced economies has constrained their ability to reduce interest rates as negative interest rates are not effective because of the shift to cash. However, monetary transmission of negative policy rates to boost demand would be more effective if currency itself can carry a negative interest rate. Hence the argument in favour of payment of negative interest rate on CBDC as an unconventional monetary policy tool to boost spending. Such steps may need to be taken with care as any instrument that pays interest (positive or negative) is strictly not a currency.

CBDC and Technology Risk

26. CBDC ecosystems may be at similar risk for cyber-attacks as the current payment systems are exposed to. Further, in countries with lower financial literacy levels, the increase in digital payment related frauds may also spread to CBDCs. Ensuring high standards of cybersecurity and parallel efforts on financial literacy is therefore essential for any country dealing with CBDC.

27. Absorption of CBDCs in the economy is also subject to technology preparedness. The creation of population scale digital currency system is contingent upon evolution of high speed internet and telecommunication networks and ensuring the wider reach of appropriate technology to the general public for storing and transacting in CBDCs. In developing countries, lower level of technology adoption may limit the reach of CBDCs and add to existing inequalities in terms of accessing financial products and services.

RBI’s approach on CBDC

28. Central Banks across the globe are engaged in exploring CBDCs and a few countries have also introduced proofs of concept / pilots on CBDC. The High Level Inter-Ministerial Committee (November 2017) constituted by Ministry of Finance, Government of India (GoI) to examine the policy and legal framework for regulation of virtual / crypto currencies had recommended the introduction of CBDCs as a digital form of fiat money in India. Like other central banks, RBI has also been exploring the pros and cons of introduction of CBDCs since quite some time.

29. Generally, countries have implemented specific purpose CBDCs in the wholesale and retail segments. Going forward, after studying the impact of these models, launch of general purpose CBDCs shall be evaluated. RBI is currently working towards a phased implementation strategy and examining use cases which could be implemented with little or no disruption. Some key issues under examination are – (i) the scope of CBDCs – whether they should be used in retail payments or also in wholesale payments; (ii) the underlying technology – whether it should be a distributed ledger or a centralized ledger, for instance, and whether the choice of technology should vary according to use cases; (iii) the validation mechanism – whether token based or account based, (iv) distribution architecture – whether direct issuance by the RBI or through banks; (v) degree of anonymity etc. However, conducting pilots in wholesale and retail segments may be a possibility in near future.

Legal Framework

30. Although CBDCs are conceptually no different from banknotes, introduction of CBDC would require an enabling legal framework since the current legal provisions are made keeping in mind currency in paper form. Under the Reserve Bank of India Act, 1934, the Bank is empowered to “…regulate the issue of bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage” (Preamble). The Reserve Bank derives the necessary statutory powers from various sections of the RBI Act – with respect to denomination (Section 24), form of banknotes (Section 25), status as legal tender (Sec 26(1)) etc. There is a need to examine consequential amendments to other Acts like The Coinage Act, 2011, FEMA, 1999, Information Technology Act, 2000 etc. Even though CBDCs will be a primarily technology driven product, it will be desirable to keep the legislation technology neutral to enable coverage of a variety of technology choices.

Conclusion

31. Introduction of CBDC has the potential to provide significant benefits, such as reduced dependency on cash, higher seigniorage due to lower transaction costs, reduced settlement risk. Introduction of CBDC would possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option. There are associated risks, no doubt, but they need to be carefully evaluated against the potential benefits. It would be RBI’s endeavour, as we move forward in the direction of India’s CBDC, to take the necessary steps which would reiterate the leadership position of India in payment systems.

CBDCs is likely to be in the arsenal of every central bank going forward. Setting this up will require careful calibration and a nuanced approach in implementation. Drawing board considerations and stakeholder consultations are important. Technological challenges have their importance as well. As is said, every idea will have to wait for its time. Perhaps the time for CBDCs is nigh.

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April 14, 2015

Dear All

Welcome to the refurbished site of the Reserve Bank of India.

The two most important features of the site are: One, in addition to the default site, the refurbished site also has all the information bifurcated functionwise; two, a much improved search – well, at least we think so but you be the judge.

With this makeover, we also take a small step into social media. We will now use Twitter (albeit one way) to send out alerts on the announcements we make and YouTube to place in public domain our press conferences, interviews of our top management, events, such as, town halls and of course, some films aimed at consumer literacy.

The site can be accessed through most browsers and devices; it also meets accessibility standards.

Please save the url of the refurbished site in your favourites as we will give up the existing site shortly and register or re-register yourselves for receiving RSS feeds for uninterrupted alerts from the Reserve Bank.

Do feel free to give us your feedback by clicking on the feedback button on the right hand corner of the refurbished site.

Thank you for your continued support.

Department of Communication

Reserve Bank of India

Next

It is not like any other year, when inflation goes up, you start tightening the monetary policy: RBI Governor Shaktikanta Das

Over the last few months, the government has taken steps to address the price rise in pulses, edible oils as also the imported inflation, but we do expect more measures from both the Centre and states to soften the pace of inflation.

By Shobhana Subramanian and KG Narendranath

Retail inflation print stayed above the upper band of the Reserve Bank of India’s 2-6% target for the second straight month in June, causing the stakeholders to watch its moves more intently. RBI started easing the policy rate since February 2019; it adopted ‘accommodative’ monetary policy stance in June 2019 and has since maintained it, given the grave challenge to economic growth due to the pandemic. Governor Shaktikanta Das expounds on the current priorities of the central bank, which is also the government’s debt manager, in an exclusive interview with Shobhana Subramanian and KG Narendranath.

Excerpts:

Is the latest retail inflation number (6.26% in June, upon a high base of 6.23%) a cause for worry or has it come as a relief (given it eased a tad from a six-month high of 6.3% in May)? How long will the RBI be able to retain the growth-supportive bias in the conduct of monetary policy?

The CPI inflation number for June is on expected lines. The year-on-year growth in ‘core’ inflation (eased marginally to 6.17% in June compared with 6.34% in May. The momentum of the CPI inflation has come down significantly in the both headline and core inflation in June.

The current inflation is largely influenced by supply-side factors. High international commodity prices, rising shipping charges and elevated pump prices of diesel and petrol (which are partly due to high taxes) are putting pressure on input prices. Prices of several food items including meat, egg, fish, pulses, edible oils, non-alcoholic beverages have risen too.

Supply-chain constraints have also arisen out of the Covid 19 related restrictions on movement of goods, and these are easing slowly. Over the last few months, the government has taken steps to address the price rise in pulses, edible oils as also the imported inflation, but we do expect more measures from both the Centre and states to soften the pace of inflation.

Last year, in July and August, CPI inflation was in excess of 6%; in September and October, it was in excess of 7% and in November, almost 7%. That was the time when the Monetary Policy Committee (MPC) had assessed that the spike in inflation was transitory and it would come down going forward. In hindsight, the MPC’s assessment was absolutely correct. Now, the MPC has assessed that inflation will moderate in Q3FY22, so I emphasise on the need to avoid any hasty action. Any hurried action, especially in the background of the current spike in inflation being transitory, could completely undo the economic recovery, which is nascent and hesitant, and create avoidable disruptions in the financial markets.

At 9.5% (real GDP) growth projected by us for FY22, the size of the economy would just about be exceeding the pre-pandemic (2019-20) level. Given that growth is still fragile, the highest priority needs to be given to it at this juncture.

We need to be very watchful and cautious before doing anything on the monetary policy front. Also, all this we have to see in the context of the truly extraordinary situation that we are in, due to the pandemic. It is not like any other year or occasion, when inflation goes up, you start tightening the monetary policy.

The Centre’s fiscal deficit is high (the budget gap more than doubled to 9.3% of GDP in FY21 and is projected to be 6.8% this year), but given the huge revenue shortfall, the size of the fiscal stimulus is limited and not adequate to push growth. Yet, the RBI needs to focus a lot on the yield curve to ensure that the government’s borrowing cost doesn’t skyrocket. Some would say the RBI’s debt management function is taking precedence over its core function, which is inflation-targeting. Is the RBI open to creating new money to directly finance the fiscal deficit?

I would not agree with the formulation that debt management is undermining inflation-targeting. In fact, our debt management operations throughout the past year and more has ensured better transmission of monetary policy decisions. We are using the instruments at our command to ensure transmission of rates. Thanks to our debt management operations, the interest rates on government borrowings in 2020-21 were the lowest in 16 years, and private-sector borrowing costs have also substantially reduced. If the real estate and construction sectors are out of the woods now, the all-time low interest rates on housing loans have had a big role in it.

We have not only reduced interest rates in consonance with monetary policy, but have also ensured availability of adequate – even surplus– liquidity in the system through OMO, Operation Twist and GSAPs. These have resulted in lower borrowing costs and financial stability across the entire gamut of stakeholders including banks, NBFCs and MFIs, and, therefore, been very supportive to economic growth.

If you look at the M3, the growth of money is just about in the range of 9-10%, meaning our accommodative stance is not really creating high inflation.

As far direct financing of the government’s fiscal deficit is concerned, this apparently easy option is out of sync with the economic reforms being undertaken; it is also in conflict with the FRBM law. In fact, this option has several downsides and the RBI has refrained from it.

What’s important is the (high) efficiency with which the RBI is meeting the borrowing requirement of the government. The Centre and states, among themselves, borrowed about ₹21-22 lakh crore, a record high amount in FY21, but at historical-low interest rates. In the current year too, there could be a borrowing quantum of the same order, and the RBI will use all the tools at its disposal to ensure that the borrowings are non-disruptive and at low interest rates.

There is ample liquidity in the system, yet the banks appear to be extremely risk-averse. They would rather park the excess funds under the reverse repo window, than lend to the industry. Even the government’s schemes like ECGLS – which insulates banks from credit risk on loans to MSMEs and retail borrowers – and the targeted liquidity policy of RBI for small NBFCs don’t seem to change the outlook much. As the regulator, how do you get this fear psychosis out of banks?

The banks have to do prudent lending with proper appraisals. Risk aversion on the part of the banks is arising from the current pandemic situation, and its possible consequences. Demand for credit from the industry is also not as high as one would expect it to be. This is because there is still a large output gap that constrains new investments.

Many large companies considerably deleveraged their bank loans in FY21, while raising money from the corporate bond market. So banks have to lend where there is a demand, and that is one reason why lending to retail sector is growing. There is no gainsaying that bank credit needs to rise; I’m sure banks will indeed lend if there is demand for credit and the projects are viable.

There is a lot of demand for loans from companies that are relatively low-rated. Banks are not willing to take any risk…

Of course, the risk perception (among lenders) is high and, precisely for that reason, the government unveiled the ECLGS scheme (under which guaranteed loans up to a limit of ₹4.5 lakh crore will be extended). If you see our TLTRO scheme or the refinancing support (special facilities for ₹75,000 crore were provided last year to all India financial institutions, including Nabard and SIDBI; a fresh support of ₹50,000 crore has been provided for new lending in FY22), the objective is that they would lend to small and micro businesses. We have also given ₹10,000 crore to small finance banks and MFIs at the repo rate (4%), again to ensure adequate fund flow to micro and small firms.

As for the healthcare sector, banks are allowed to park their surplus liquidity up equivalent of the size of their Covid loan books with the RBI at a higher rate. We are also according priority-sector status to certain loans for the healthcare sector. So, because of the extraordinary situation, we are incentivising the banks to lend more through a series of measures.

As the regulator, our job is to provide an ecosystem where the banking sector functions in a very robust manner. But beyond that, who the banks will lend to or won’t lend to must be based on their own risk assessment, and the prudential norms.

In the recent financial stability report (FSR), the worst-case NPA scenario after the full withdrawal of forbearance is foreseen to be better than the best case perceived in the January edition…

We had a much clearer view of the assent quality in the July FSR than when the January edition was drafted, when the regulatory forbearance partially blurred the picture. Still, these are assumptions and analytical exercises rather than projections. These could serve as guidance to the banks in their internal analysis of, say, a possible severe stress scenario. We expect the banks could use these inputs to take proactive, pre-emptive measures on two fronts specifically: increasing the provision coverage ratio and mobilsing additional capital to deal with situations of stress or a severe stress, should these happen.

These assumptions, based on real numbers, could by and large hold true, unless a third Covid-19 wave plays spoilsport.

In the auction held on Friday, you allowed the benchmark yield to go up to 6.1%, while it had long seemed you won’t tolerate a rate above 6%…

We’ve never had any fixation that the yield should be 6%, but some of our actions might have conveyed that impression. After the presentation of the Budget (for FY22) and other developments such as the enhanced government borrowing, the bond yields suddenly spiked. The 10-year G-secs, for example, reached 6.26%. But after that, through our signals and actions (in the form of open market operations, Operations Twist and G-SAP, and our actions during auctions, going sometimes for the green-shoe option or sometime for cancellations, etc) we signalled our comfort level to the markets.

So, we are able to bring down the yield and the rates, by and large, remained less than 6% till about January or so. The first auction that we did last Friday when we introduced the new-tenure benchmark reflected one important thing that the focus of the central bank is on the orderly evolution of the yield curve and the market expectations seem to be converging with this approach. So, it will be in the interest of all stakeholders, the economy, if the same spirit of convergence between the market participants and other stakeholders, and the central bank continues and I expect it will continue.

A jump in the RBI’s ‘realised profits’ from sale of foreign exchange enabled you to transfer a higher-than-expected ₹99,122 crore as surplus to the government for the nine months to March 31, 2021. Are you sticking to the economic capital framework as revised on the lines of the Bimal Jalan committee’s recommendations?

One of the key recommendations of the committee is that unrealised gains will not be transferred as a part of surplus and we are strictly following that. We intervene in the market to buy and sell foreign currencies, and what we earn out of that are realised gains. A large part of the surplus transfer constitutes the exchange gains from foreign exchange transactions. So whatever gains we make out of this are not unrealised (notional) gains (which can’t be transferred under ECF). We also make losses in such transactions, because RBI isn’t in the game of making profit but in the game of maintaining stability of the exchange rate and ensuring broader financial stability.

Last year, about ₹70,000 crore had to be transferred to the contingency reserve fund because it was falling short of the 5.5% level recommended by the Jalan committee. This was because our balance sheet size grew substantially last year due to liquidity operations that we undertook in March, April and May. So, last year the larger size of the RBI’s balance sheet required that as much as ₹70,000 crore be transferred to the contingency reserve fund. This year, the expansion of balance-sheet wasn’t that much, so the transfer was much less at about ₹25,000 crore.

April 14, 2015

Dear All

Welcome to the refurbished site of the Reserve Bank of India.

The two most important features of the site are: One, in addition to the default site, the refurbished site also has all the information bifurcated functionwise; two, a much improved search – well, at least we think so but you be the judge.

With this makeover, we also take a small step into social media. We will now use Twitter (albeit one way) to send out alerts on the announcements we make and YouTube to place in public domain our press conferences, interviews of our top management, events, such as, town halls and of course, some films aimed at consumer literacy.

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April 14, 2015

Dear All

Welcome to the refurbished site of the Reserve Bank of India.

The two most important features of the site are: One, in addition to the default site, the refurbished site also has all the information bifurcated functionwise; two, a much improved search – well, at least we think so but you be the judge.

With this makeover, we also take a small step into social media. We will now use Twitter (albeit one way) to send out alerts on the announcements we make and YouTube to place in public domain our press conferences, interviews of our top management, events, such as, town halls and of course, some films aimed at consumer literacy.

The site can be accessed through most browsers and devices; it also meets accessibility standards.

Please save the url of the refurbished site in your favourites as we will give up the existing site shortly and register or re-register yourselves for receiving RSS feeds for uninterrupted alerts from the Reserve Bank.

Do feel free to give us your feedback by clicking on the feedback button on the right hand corner of the refurbished site.

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April 14, 2015

Dear All

Welcome to the refurbished site of the Reserve Bank of India.

The two most important features of the site are: One, in addition to the default site, the refurbished site also has all the information bifurcated functionwise; two, a much improved search – well, at least we think so but you be the judge.

With this makeover, we also take a small step into social media. We will now use Twitter (albeit one way) to send out alerts on the announcements we make and YouTube to place in public domain our press conferences, interviews of our top management, events, such as, town halls and of course, some films aimed at consumer literacy.

The site can be accessed through most browsers and devices; it also meets accessibility standards.

Please save the url of the refurbished site in your favourites as we will give up the existing site shortly and register or re-register yourselves for receiving RSS feeds for uninterrupted alerts from the Reserve Bank.

Do feel free to give us your feedback by clicking on the feedback button on the right hand corner of the refurbished site.

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Hasty withdrawal of easy policy can undo gains: RBI Governor Shaktikanta Das

Inflation is showing signs of stickiness, but it is only a “transitory hump” that should moderate in the third quarter, he said.

The govt has taken certain supply side measures in recent weeks but more such measures are necessary, especially on taxes from both Central and state governments, the RBI Governor said

Any hasty withdrawal from the present monetary policy accommodation can potentially undo all the gains that have been achieved after the devastating Covid-19 pandemic, Reserve Bank of India (RBI) Governor Shaktikanta Das told Business Standard in an exclusive interview.

Inflation is showing signs of stickiness, but it is only a “transitory hump” that should moderate in the third quarter, he said. Therefore, the monetary policy committee (MPC) is more inclined to look through the perk-up in prices, as “growth is the main challenge” for now.

The governor said the RBI is still very watchful about the inflation scenario, but is taking comfort in the 2-6 per cent range allowed by the flexible inflation targeting regime. Ultimately, the aim of the central bank is to ensure that inflationary expectations remain firmly anchored at around 4 per cent.

The governor is confident of his 9.5 per cent growth rate projection for this fiscal. “The second wave of Covid is behind us, and high-speed indicators point to a pick-up in economic activities, though it’s a long shot to reach the pre-pandemic level of growth.”

Notwithstanding the monetary policy tightening guidance given by the US Federal Reserve, India’s own monetary policy will be driven by domestic considerations, the governor said.

India’s foreign exchange reserves of $609 billion give adequate protection against any volatility, and should give protection to the domestic exchange rate. The reserves cover 15 months of imports, and are more than the country’s overall external debt. With the reserves, there should be “no doubt in the market about India’s capacity to deal with the situation of outflows,” the governor said.

However, the RBI is also mindful that the reserves are capital-flow driven. There is a liability created against the reserves and they have not been generated due to trade surpluses.

Therefore, there is no question of using the reserves for any other purposes.

The governor was also candid enough to admit that the central bank does intervene in the offshore non-deliverable forwards market to quell volatility in the domestic exchange rate.

Ultimately, the aim is that the offshore and onshore markets get integrated and price discovery happens in an efficient manner, he said.

Reserves remove doubt on ability to act: RBI Governor Shaktikanta Das

Economic activities are expected to improve further going into July or into the second half, says Governor Das

The Reserve Bank of India (RBI) is mindful of the entire yield curve and is not just focused on the 10-year bond. However, the 10-year bond has a larger impact on other rates. Hence, the central bank’s intervention in it was greater than in other papers, said RBI Governor Shaktikanta Das in an interview with Anup Roy and Vishal Chhabria. India’s monetary policy will be driven by domestic considerations, notwithstanding the stance taken by the US Federal Reserve. Any volatility in the currency can be addressed with the vast foreign exchange reserve of $609 billion, the governor said. Edited excerpts:

You have said the impact of the second wave of Covid-19 could be limited to the first quarter, but your survey in the Financial Stability Report (FSR) says business expectations are down; the job scenario, wages, and productivity are unlikely to improve in the short term…

Activities had revived in the fourth quarter (Q4) of last year, and in the second half the economy had emerged out of contraction and had entered positive territory. Then we had the interruption of the second wave, which peaked in May. If you look at the high speed indicators, sequentially there are growing signs of improvement in certain indicators. For example, data on freight traffic, GST e-way bills, import and export, electricity consumption, volume of transactions in the payment and settlement systems are showing sequential improvement. The lockdowns were localised this time and economic activities, including manufacturing, continued. Individuals and businesses have better adapted to Covid protocols. So, we feel that the worst of the second wave is behind us. Economic activities are expected to improve further going into July or into the second half. Further, congenial financial conditions continue to prevail and vaccination is gathering pace. We made our detailed assessment on that basis, and we feel our projection of 9.5 per cent is quite realistic.

The numbers probably capture the formal economy. How do we gauge the informal economy, where the impact could have been much more?

In the rural areas there was good agricultural production last year, and there are expectations of a good monsoon this year. Both of them provide strong support to the rural sector and going forward that should support rural demand and also incomes. We do our own internal assessments and surveys to gauge informal economy data.

RBI’s resolution framework 2.0 was specifically targeted at the micro, small and medium enterprises (MSMEs) and small businesses. We have also provided targeted liquidity support through the banks, including the small finance banks and through them to the smaller non-banking financial companies (NBFCs) and the microfinance institutions.

The FSR says the true state of bank balance sheets will be revealed once the effects of regulatory forbearance fully plays out, but your worst case estimate this year is better than the best case estimate of last year, in terms of non-performing assets…

When we came out with the last FSR in January, the regulatory forbearances were still in operation. The Supreme Court had ordered asset classification standstill immediately after the six months moratorium was over and our resolution framework 1.0 was still under implementation. So, therefore, asset quality recognition was camouflaged because of these dispensations. So, the FSR had relied upon the figures of December 2019 as the base because it was not contaminated by the Covid numbers.

In the July 2021 FSR, we have a clearer picture of bad debts. The base of March 31, 2021, numbers are, therefore, far more realistic. The second wave’s impact is something that we’ll see over the coming months. But having said that, I would like to add that Indian banks are far more resilient today than they were earlier. Today, the gross non-performing assets (GNPAs) are about 7.5 per cent. The provision coverage ratio is close to 69 per cent, capital adequacy ratio is about 16 per cent. So, therefore, in terms of resilience, the banks are in a better place today. Having said that, there is also a necessity to continuously monitor and augment the capital adequacy of banks, given the overall uncertain outlook on the Covid front.

If there is an unexpected rise in bad debts, will RBI extend a helping hand to banks in terms of regulatory dispensation?

I would not like to comment on what we would do in future, but let me make one thing clear: RBI, as an institution, would not like to delay or postpone any asset quality recognition. It is always better that the asset quality is recognised in time and addressed and resolved in time.

RBI has decided to look past inflation for now. But, inflation is sticky and the real interest rate is negative. Are you worried?

The headline inflation, and inflationary expectations were well anchored at 4 per cent before the onset of the pandemic. We would like to consolidate and preserve those gains. Stable inflation has its advantages in terms of reducing uncertainty for investors, for businesses, for everybody, and eventually it supports growth. But then we had an extraordinary situation arising because of the pandemic. The flexible inflation targeting framework allows us to target within a range of 2-6 per cent. The Monetary Policy Committee, therefore, focused on keeping headline inflation within this range. The consumer inflation narrative comes from other emerging economies’ central banks, some of them have increased their rates, of course, but the narrative is that it is a transitory phenomenon. The current inflation spike appears to be transitory, driven largely by supply side factors and going forward, it is expected to moderate in the third quarter. We are very watchful of the emerging inflation trends and momentum. Any hasty withdrawal of monetary policy support will negate the nascent or incipient recovery that is taking place. So, therefore, RBI will remain watchful. And the MPC will take appropriate decisions depending on the evolving situation.

You have shifted your guidance to state based, from time based. Why so?

As I said, any hasty withdrawal can undo the gains in the face of economic revival. In 2020, the CPI inflation exceeded 6 per cent in July-August and 7 per cent in September-October. But the MPC believed that inflation would moderate in December and January. So, the MPC decided to continue with the accommodative stance with the belief that inflation was transitory. The MPC focussed on assuaging market expectations of an inflation spike. Sure enough, inflation came down to little above 4 per cent during December 2020-March 2021. In hindsight, the time-based guidance provided by the MPC was the right call to take because it anchored market expectations. We are monitoring the inflation situation closely and we now feel that the state based guidance is appropriate in the current context.

Are you not building up expectations in the market? The bond market seems to be assured that whatever happens to inflation, bond yields will remain stable.

We are very watchful about inflation and growth. But the main challenge is economic revival and growth. Let us not forget that 2020-21 witnessed a severe contraction of 7.3 per cent and the 9.5 per cent growth projection for the current year is built on that.

The economy needs to reach and exceed the pre-pandemic level of growth. We are acutely conscious and sensitive to the fact that a hasty reversal of monetary policy stance or monetary policy approach can have serious consequences for the economic recovery. But we also want to anchor inflation expectations within the tolerance band and closer to the inflation target in the medium term. The current inflection in inflation is also largely impacted by supply side issues. International commodities and crude prices have also risen. The government has taken certain supply side measures in recent weeks but more supply side measures are necessary and we are actually looking forward to more such measures, especially on taxes from both Central and state governments.

Is the RBI policy hostage to the huge borrowing programmes of the government?

It is a fact that the borrowing programmes of both the Centre and states are huge. The pandemic crashed government revenues last year. This year it looks better so far. But on the expenditure side also there are pressures on the government to spend more. The net result is that the borrowing had to be higher, both for the Centre and the states. RBI as the debt manager of the government is committed to ensuring non-disruptive implementation of the borrowing programme at the lowest possible cost and our efforts are in that direction.

The Reserve Bank will continue to deploy various instruments at its command. Interestingly, over the last one year, the debt management function of the RBI has actually facilitated better monetary policy transmission.

The various conventional, unconventional and the new kinds of measures which RBI has undertaken, such as G-SAP, TLTRO, etc. together with appropriate communication and signals have ensured the lowest borrowing cost for the government in the last 16 years in 2020-21.

The G-Sec yields act as a benchmark for the private sector borrowing.

Corporates and businesses were able to raise cheaper funds by way of corporate bonds. This has helped them to have adequate liquidity and undertake deleveraging, etc. The debt management exercise of RBI throughout the pandemic has indeed ensured better interest rates for the entire economy. All conventional and unconventional actions of RBI as a debt manager, and also the central bank are basically in that direction.

Why did you buy most of the 10-year bonds from the market?

The 10-year benchmark has a bigger influence on the yield curve as a whole. But it is wrong to assume that we are focusing only on 10-year bonds. We are focused on the entire maturity curve. If you look at our last G-SAP announcement, we are targeting six- to 12-year maturity G-Secs.

Why have you accumulated so much reserves? Is it to address volatility, or are you building a sort of permanent reserve for other purposes as well?

Internationally, capital flows involve a lot of volatility. Especially, in the current context when all the advanced economies have adopted ultra-accommodative monetary policies, there is naturally a lot of liquidity floating around. But capital flows are also very volatile. The emerging market economies, in this kind of a scenario, have to build their own buffers, their own safety nets.

A strong foreign exchange reserve is the best safety net against global spillovers. Also, it renders a considerable amount of stability to the exchange rate. It also eliminates doubts in the market about a country’s capacity to deal with a situation of outflows. Today, India is much better placed at $609 billion forex reserves. It covers about 15 months of projected imports for 2021-22. It covers more than our overall external debt.

Are you taking private help for managing reserves?

These are all options. There is no plan to outsource the forex reserve management functions of RBI. The reserve management will be done by RBI, and while doing so, we are always considering various options of how to improve our internal skills by harnessing external expertise.

The reserve management works on three principles — safety, liquidity and return — in that order. RBI is not chasing any return as such, it is our last priority. So, utilisation of external expertise would augment our own capabilities.

Can the reserve be used for other purposes as well?

The reserves are not our own money. It is not that we have built it up by way of trade surplus. If we have reserves, we also have liabilities against them. Capital flows are a strong contributor to our reserves. We have to be watchful. Our current level of reserves gives us confidence, but we cannot be complacent.

How concerned are you now that the Fed has indicated raising rates?

The monetary policy action of the US Fed will impact all economies across the globe, particularly emerging market economies, and India will also be affected. But the principal focus of our monetary policy will be the domestic macroeconomic situation and the domestic growth inflation dynamics. Our policy will be more governed by domestic factors.

Do you get a feeling that the currency market is getting out of hand for the RBI because of the non-deliverable forward (NDF) size? By bringing it onshore, are you legitimising NDF?

NDF is a fact of life. The volumes are much more than the onshore transactions. It is bound to happen in a country, as long as there are capital controls. Our current endeavour is to address market segmentation between offshore and onshore markets. We have given access to non-residents to the onshore market. We have enabled Indian banks to participate in the offshore market 24 hours and five days a week. The segmentation between onshore and offshore markets is steadily getting eliminated. This will improve pricing and efficiency.

How happy are you with the way IBC is progressing? There are delays, and the haircuts are steep.

The main concern around the IBC resolution is that it is taking too much time — more than a year. It happens because of litigation and counter-litigation. The average time for resolution under IBC needs to be compressed. That is something we expect should happen because this is a new law, which was enacted and implemented in 2016. The jurisprudence around the new law is also getting established. The average resolution time taken under IBC needs to be quicker.

If we look at the numbers for the comparable period (2014-15 to 2019-20), the average recovery in the case of Lok Adalat was 5 per cent. In the case of DRT, it was 6 per cent; in the case of SARFAESI, it was 20 per cent. In the case of IBC, the average is still 40 per cent. If you exclude 2020-21 — the pandemic year — the average recovery under IBC was 45 per cent.

We should judge the success of IBC, not just from the point of view of percentage of recovery. There are other parameters to judge its success. IBC has spurred banks to recognise their bad debts in time. It has also instilled a strong credit and repayment culture by both banks and borrowers.

You have been a bold governor. Can a country like India afford to adopt a whatever-it-takes policy?

Covid-19 was a shocker of extraordinary proportions. India, after several decades, witnessed a contraction of 7.3 per cent. The loss of lives and livelihoods was unprecedented. It was a global shock and central banks the world over came to the forefront to battle economic crises. For central banks, it was a whatever-it-takes moment, and the RBI was no exception. We adopted conventional, unconventional, and new measures. Some of them were similar to what the advanced economies were undertaking, some designed to deal with local challenges.

For example, the resolution framework factored in the prudent principles of resolution and the need to support businesses. We adopted measures such as bond purchase programmes, reduced interest rates, and adopted an accommodative stance. At the same time, we undertook other measures like targeted liquidity for smaller NBFCs and mutual funds. The RBI’s whatever-it-takes approach has helped insulate the economy and the financial markets from a possible crisis and ensured financial stability.

What is the status of India’s inclusion in the global bond indices and the central bank’s digital currency?

They are both works in progress. As far as our inclusion in the global bond index is concerned, we are working closely with three or four agencies. In fact, one of the bond index providers has placed India on the watchlist, perhaps as a prelude to our inclusion in the bond index. We are in active dialogue with them, as also with the other bond index providers. We hope to see this effort gain more traction in the days to come. With regard to the central bank’s digital currency, we are discussing the technology/cybersecurity aspects. I cannot give a timeline. This is something that has got other implications on monetary policy and on overall savings.

April 14, 2015

Dear All

Welcome to the refurbished site of the Reserve Bank of India.

The two most important features of the site are: One, in addition to the default site, the refurbished site also has all the information bifurcated functionwise; two, a much improved search – well, at least we think so but you be the judge.

With this makeover, we also take a small step into social media. We will now use Twitter (albeit one way) to send out alerts on the announcements we make and YouTube to place in public domain our press conferences, interviews of our top management, events, such as, town halls and of course, some films aimed at consumer literacy.

The site can be accessed through most browsers and devices; it also meets accessibility standards.

Please save the url of the refurbished site in your favourites as we will give up the existing site shortly and register or re-register yourselves for receiving RSS feeds for uninterrupted alerts from the Reserve Bank.

Do feel free to give us your feedback by clicking on the feedback button on the right hand corner of the refurbished site.

Thank you for your continued support.

Department of Communication

Reserve Bank of India

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