Emerging markets economies (EMEs) such as India will have to build reserves to mitigate spillovers of loose monitoring policies pursued by developed nations, even at the risk of being labelled currency manipulator by the US government, (RBI) governor on Saturday said.


“Under (an) uncertain global economic environment, EMEs typically remain at the receiving end. In order to mitigate global spillovers, they have no recourse but to build their own forex reserve buffers, even at the cost of being included in currency manipulators list or monitoring list of the US Treasury,” governor Das said while delivering the annual Nani Palkhivala lecture.


India’s foreign exchange reserves have crossed $580 billion. The US Treasury in December included India in the currency manipulator watchlist with nine others for one-sided intervention preventing rupee appreciation. A fast accumulation of reserves, about $100 billion in a year, was cited by the US Treasury. The governor though, made it abundantly clear that India will not be bothered by such cautions, as it is pursuing its policies to preserve its own financial stability from wild swings in capital flows.





“I feel that this aspect needs greater understanding on both sides so that EMEs can actively use policy tools to overcome the capital flow related challenges,” Das said, adding, is closely monitoring both global headwinds and tailwinds while assessing the domestic macroeconomic situation and its resilience.


Sustained accretion to foreign exchange reserves has improved India’s import cover to 18.4 months, and the reserves cover 236 per cent of the short-term debt in terms of residual maturity.


The sound external sector indicators “augur well for limiting the impact of spillovers of possible global shocks and financial stability concerns as investors and markets are credibly assured of the buffer against potential contagion.”


“While abundant capital inflows have been largely driven by accommodative global liquidity conditions and India’s optimistic medium-term growth outlook, domestic financial markets must remain prepared for sudden stops and reversals, should the global risk aversion factors take hold,” Das said.


Maintaining financial stability remains one of the “uppermost objectives of the Reserve Bank,” and the central bank will do “whatever is necessary on this front,” the governor said.


However, it can be best done with multiple regulators in place, and not with a single regulator, he said in a subsequent question and answer session. A single regulator is something that the government tried to do in the past.


“A single regulator also has its own downsides in the sense that the financial sector has become so large and so complex that a single regulator may lose sight of various segments of the regulated economy. If you have a SEBI looking at the capital markets, they are much more focused. If you have looking at the financial stability, money markets, financial markets, the monetary policy, then it’s much more focused, same is the case with the insurance regulator,” the governor said, adding the regulators interact regularly and try to resolve common issues.


There is a need to look at the financial sector in its entirety, even as banks, non-banks, financial markets and payment systems remain at the core of financial stability issues. The financial system works as a pivot between various sectors of the economy.

Financial stability thus needs to be seen in a broader perspective and must include not just the stability of the financial system and monetary stability (price stability), but also fiscal sustainability and external sector viability.


“All these operate in a feedback loop, and disturbances in any of the segments do get propagated to other segments with the potential of disrupting systemic stability,” Das said.


The RBI governor once again harped on the governance structure of the financial entities it regulates. “Recent events in our rapidly evolving financial landscape have led to increasing scrutiny of the role of promoters, major shareholders and senior management vis-à-vis the role of the Board. The RBI is constantly focused on strengthening the related regulations and deepening its supervision of financial entities,” he said. The financial entities must have effective risk management, compliance functions and assurance mechanisms that should work as the first line of defence.


RBI has taken a number of measures to enhance compliance and internal audit functions in and, “some more measures on improving governance in and NBFCs are in the pipeline,” the RBI governor said.


Answering to queries, the RBI governor said the central bank is open to examining the prospects of floating a bad bank, but it is “for the government and private sector players to really plan for it.”


The RBI is also preparing a discussion paper on scale-based regulation of NBFCs, and that should be due in the next week. The focus will be to nurture the NBFC sector to ensure that both the big and small entities have sufficient flexibility to operate and grow. The focus will also be on describing certain prudential regulations.


It is important that the and non-banks get adequately capitalised.


“The current COVID19 pandemic related shock will place greater pressure on the balance sheets of banks in terms of non-performing assets, leading to erosion of capital. Building buffers and raising capital by banks – both in the public and private sector – will be crucial not only to ensure credit flow but also to build resilience in the financial system.”

In its Trends and Progress report, the RBI had estimated that the potential recapitalisation requirements for meeting regulatory norms as well as for supporting growth capital may be to the extent of 150 basis points of the core equity capital of banks. Such capital raising should be fast-tracked.


The RBI has advised all banks large non-deposit taking NBFCs and all deposit-taking NBFCs to assess the impact of COVID-19 on their balance sheet, asset quality, liquidity, profitability and capital adequacy, and work out possible mitigation measures including capital planning, capital raising, and contingency liquidity planning, among others, the governor informed.




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