RBI’s updated strategy requires another update

It was felt for a long time, erroneously, that ‘strategy’ or ‘vision’ documents belonged exclusively to the domain of corporate boardrooms or business school classrooms. As the world becomes more complex and layered, everybody needs a strategy, including central banks. Financial systems in almost all economies have become exceedingly elaborate, entangled and labyrinthine; this requires central banks to detect incipient signs of financial instability which could arise anywhere in the system and turn contagious. The second layer is the impact of fiscal policy on the economy; in India, we have the complication of the Reserve Bank of India (RBI) mandated to sell government bonds. Plus, a globalized world requires central banks to watch over foreign exchange flows and manage currency-rate volatility. The top-most layer involves watching the economy’s monetary dynamics, especially the often-tricky balance of price stability and growth. It’s a highly complicated task and RBI has done the right thing by drawing up a formal medium-term strategy document. This is better than management by the seat of one’s pants, or even annual plans. Yet, two areas in RBI’s strategy document for 2023-25, Utkarsh 2.0, are crying out for improvement.

The document would have been far more useful and will probably yield superior outcomes had it tried to nail down specific challenges and a detailed plan on how RBI proposes to engage with them. As the world inexorably moves towards a new global order, the central bank is likely to face a rising number of curve balls. In these circumstances, it should have concrete proposals on preparing itself for an imminent churn in prevalent systems. For example, the Core Purpose outlined in Utkarsh 2.0 is a reworked version of the Reserve Bank of India Act’s preamble, which was amended and changed in 2016 as a precursor to RBI’s formal adoption of a flexible inflation targeting regime. Many specific strategy points mentioned are also core to what a central bank is expected to discharge anyway. For example, Strategy No. 9 in Vision-I (Excellence in the Performance of its Functions) states: “Create a resilient financial intermediation ecosystem; refining the regulatory and supervisory framework for its robust and strong sustenance.” This is more an objective, a desirable end-result, than a strategy; ideally, a strategy should delineate a pathway for achieving that. Here’s another example from Strategy No. 8 for Vision-II (Strengthened Trust of Citizens and Institutions in the Reserve Bank of India): “Ensuring sound and comprehensive internal and external RBI policies.” While it might be imprudent to expect RBI to reveal its currency strategy, the central bank would have benefited by shedding some light on how exactly it expects to achieve its ambitious plans.

The other major gap in Utkarsh 2.0 is its noticeable absence of climate finance or green central banking. This is odd, given that the risks and modes of financing are bound to change as countries race to meet their nationally determined contributions in a globally coordinated effort to arrest global warming. By current reckoning, this portends a step change in the central bank’s risk management methodology and would call for some overhaul of its existing strategy framework. RBI must stay alert to a wider range of scenarios that can unfold than its strategy document suggests. Some candour and a feedback loop with the public would have helped our central bank arm itself better against future uncertainties.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint.
Download The Mint News App to get Daily Market Updates.


Source link

Tags: No tags

Add a Comment

Your email address will not be published. Required fields are marked *