Parsing the RBI’s Financial Stability Report

Abstract

The Reserve Bank of India sits at the apex of the financial system. It is the banker and debt manager to the Government of India, banker to banks, regulator, licensor and supervisor of banks, regulator of payment and settlement systems and manager of foreign exchange of the country. It has an important role to play in monetary policy formulation and subsequent modulation of liquidity conditions to ensure transmission of monetary policy to the financial system. It is the issuer of paper currency and can also create electronic money “out of thin air”, when it pays banks for the securities it purchases from them. Any action of RBI therefore attracts a flurry of attention in the financial media, even if it is something as mundane as the publication of a report on financial stability. The latest such report published in December 2019, has the usual platitudes like “India’s financial system remains stable notwithstanding weakening domestic growth” and “risks arising out of global/domestic economic uncertainties and geopolitical developments persist”. The report also provides many interesting insights into the state of the economy and the banking system. While underscoring the slowdown in aggregate demand, it has understandably kept away from touching upon sensitive issues like demonetization and GST implementation.