How has the RBI evolved: Next phase for RBI: Central bank should be empowered further

Source: The post on how the RBI evolved has been created, based on the article “Next phase for RBI: Central bank should be empowered further” published in “Business standard” on 2nd April 2024.

UPSC Syllabus Topic: GS Paper 3 – Indian economy – mobilization of resources (banking) and GS Paper 2 – governance – Statutory, regulatory and various quasi-judicial bodies

News: The article discusses the Reserve Bank of India’s (RBI) 90th anniversary and its role in economic growth. It also highlights areas needing improvement, such as banking regulation and adapting to new financial technologies.

How has the RBI evolved?

Inflation-targeting central bank: RBI evolved into an inflation-targeting central bank, enhancing monetary policy transparency and boosting investor confidence.

Foreign exchange reserves: Managed the external sector skillfully, accumulating large foreign exchange reserves to reduce currency volatility.

Macroeconomic stability: Improved macroeconomic stability, evident in recent years through effective management.

Reduction in NPAs: Non-Performing Assets (NPAs) in banks reduced significantly, with the banking system in its best position in over a decade.

Technology in payments: The RBI’s role in facilitating technology adoption in payments, making India a leader in this area, is acknowledged.

Central bank digital currency: Pioneered experiments with central bank digital currency, indicating readiness for future financial challenges.

What challenges is the RBI facing?

Banking Regulation and Supervision: The RBI needs to enhance its regulatory and supervisory mechanisms, as demonstrated by the problems at YES Bank and Infrastructure Leasing & Financial Services Ltd.

Transparency with Regulated Entities: There’s a challenge in maintaining transparency, specifically highlighted by the RBI’s dealings with Paytm Payments Bank.

Regulating New-Age Fintech Firms: The RBI faces the challenge of effectively regulating emerging fintech firms while balancing the need for innovation.

Limited Powers over Public-Sector Banks: The RBI’s constrained ability to regulate public-sector banks is mentioned, indicating a need for legal changes to empower the institution more effectively.

Potential Fiscal Dominance of Monetary Policy: The government’s role in fiscal policy could overshadow the RBI’s monetary policy, stressing the need for the government to maintain low fiscal deficits.

Question for practice:

Discuss the evolution and challenges faced by the Reserve Bank of India (RBI) in its role as a central bank.