RBI's fresh approach is promising

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RBI's fresh approach is promising

Wednesday, 15 March 2023 | Sumeet Bhasin

RBI's fresh approach is promising

RBI is now making economic policies that are based on domestic realities. It is no longer towing the policies of central banks in the West

The US has once more bailed out a failed bank. Silicon Valley Bank (SVB) had about $209 billion in assets. It was hailed as one of the best US banks. The California-based financial institution was known as a new-age banking institution with high technology quotient. Over a period, SVB drove the startups to dizzying heights with ease of access to funds, enabling venture capitalists to ride the bandwagon of a fast-faced capitalist play to chase the topline.

In 14 years, the US had to bail out another banking institution. The SVB collapse is stated to be the second biggest in US banking history and the first major collapse after the Lehman Brothers went broke. The principal reason for the SVB collapse is cited as the rush of the depositors to withdraw their money. The SVB had to sell its bonds at heavy discounts after taking major haircuts. The SVB collapse is linked to the rate hikes in the US.

The US Federal Reserve remains hawkish. The rate hikes have been aggressive, and the peak rate is now threatening to top six per cent in the US. The commentaries coming from the US Federal Reserve give hints of a long string of hikes in the next few months. The high rate regime makes the financial institutions vulnerable as the gaps between the deposit and lending rates become narrow while reducing margins for the banks to stay healthy.

Israel’s Prime Minister Benjamin Netanyahu has moved fast to check on the likely impact on the startups. Israel is a global startup leader. Union Minister for IT and Electronics Rajeev Chandrashekhar has also said that he would take stock of the potential exposure of the Indian startup ecosystem to the failed SVB. Over time, we will know the full extent of the impact on the world economy and also India about the failure of the SVB to survive the rate hike spiral in the US.

In India, the immediate memory of a banking institution going broke is of the Yes Bank. The Reserve Bank of India and the government worked in tandem to stabilize the situation. The State Bank of India had stepped into the situation with equity and capital infusion to instil confidence among the customers of Yes Bank. Within a short period, Yes Bank is now looking healthy and is on the path to normalcy. But the Yes Bank had gone broke for reasons not associated with the SVB collapse.

The Indian parliament stepped in to establish a robust financial market regulatory architecture to build an ecosystem to ensure that there are no lapses on the part of the board of management to compromise on the banking principles. Satisfactorily, no banking institution after the Yes Bank has shown signs of distress even while there had been a few cases of the cooperatives. With the unveiling of the Ministry of Cooperatives and measures of the RBI, rural banking is also largely now in safe hands.

But it’s worthwhile to examine and study if the monetary policy of India is indeed coming out with the right recipe to deal with the macroeconomic challenges faced by the country. The RBI is mandated by parliament to manage inflation. Under the amended law, the RBI is also mandated to ensure that inflation stays in a range, and the Central Bank is liable to inform parliament if the ceiling is breached for three successive months.

But the last two sessions of parliament didn’t show any signs of the lawmakers being worried about the ability of the RBI to manage inflation within the mandated range. Winter and the first half of the budget sessions of parliament were largely washed out on account of the ruckus in the two Houses.

It’s pertinent to ask the RBI to offer empirical evidence that its stance of hiking rates is working to cool down inflation. There is ample evidence for a contrarian position that the monetary policy obsessed with hiking rates doesn’t work. Some of the leading economic thinkers the world over have warned that the Central banks globally by sticking to their singular obsession to hike rates would take the people into a long spell of recession.

Europe is already in the grip of a recession. The US is almost at the stage of recession. India is the only economy growing at about seven per cent. China sunk to a three per cent growth rate. Can India afford to arrest its growth rate by squeezing out capital for businesses?

It’s also worthwhile to ask why the RBI is part of the global herd mentality of the Central banks. Aren’t the people who constitute the RBI monetary policy committee (MPC) still holding close to their hearts the 19th-century economic worldviews? Are the MPC members really on board with the government’s resolve for a self-reliant India? Empirically, answers appear to be disappointing.

Medium and small enterprises (MSMEs) are facing the heat of capital inadequacy. Debt servicing is robbing them of their working capital. The appetite to take a fresh working capital loan is fast reducing. India certainly doesn’t have the comfort of the developed world to compromise its growth prospects by blindly following the US Federal Reserve.

The old mindset among the people was to save for the future. Today’s mindset is to spend and enjoy life. Unlike the popularity of the national savings schemes, Kisan Vikas Patra of the last century, the equity market, pension funds, and mutual funds are now popular among most of the people in the country. The RBY MPC actions are completely opposed to the new-age investment and savings mantra of the people, which are also being encouraged by the new income tax regime. The RBI needs urgently to smell changes and breathe fresh air. The tightening of monetary policy is a surefooted recipe to arrest Indian growth. India’s demographic dividend prospects may stand compromised.

The US and the developed world are guilty of taking the easy route to deal with the Covid-19 pandemic. They resorted to printing money. They flooded their markets with cash. India treated the path of reason and maturity. We didn’t print cash. We insulated the vulnerable from the risks of the pandemic with schemes such as the Pradhan Mantri Garib Kalyan Anna Yojna. We came out with production-linked incentive (PLI) schemes to give a new direction to the economy. When we didn’t copy the developed world in dealing with the economic consequences of the Covid-19 pandemic, why should we toe the line of their Central banks by raising the policy rates?

Now that the MPC of the RBI is now showing signs of an independent economic worldview it’s incumbent upon parliament to discuss issues threadbare. Parliament must ponder why India lacks a 25-year plan for policy rates. Not only the small and marginal industries but also the middle class must be protected from the high-interest rate regime, which has already burdened them with high EMIs. The RBI MPC must not remain static in their ways. The world is changing fast. We must embrace agility. Smell the change, RBI!

(The writer is a policy analyst)

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