What the Reserve Bank’s Financial Stability Report portends?

Abstract

Central banks are positioned at the apex of the financial system. They possess enormous power to create money “out of thin air”; for example, using electronic accounting entries, the New York Federal reserve built up a balance sheet of nearly 4.5 trillion dollars through quantitative easing, post the Global Financial Crisis. COVID-19 and associated monetary stimulus measures have seen further balance sheet expansion of most major central banks, close to the GDP of some economies. The Reserve Bank of India, by virtue of its independence and professionalism, carries tremendous respect in the financial markets. Stories are legion of the governors of RBI fiercely protecting their independence from their political masters, from YV Reddy to Subba Rao, Raghuram Rajan to Urjit Patel. Much of this institutional credibility has carried forward to the current dispensation, headed by a former senior government official, a significant difference in profile from the economists/technocrats who led the central bank in the past. A noncontroversial relationship between the central bank and the government may better suit today’s turbulent times for the COVID-19 economy and the financial system, in contrast to the frequent tussles played out in the media in the past. The tussle is best exemplified by the fiery speech of the former RBI Deputy Governor Dr. Viral Acharya about “governments that do not respect central bank independence sooner or later incurring the wrath of financial markets, igniting economic fire, and coming to rue the day they undermined an important regulatory institution”. With an impassive head at the helm now, the media will have to look elsewhere for such headlines!