The central bank, so far, this fiscal, has purchased over Rs 3 trillion of central and state government bonds from the secondary market to provide liquidity to the system.
Unlike many central banks, though, the RBI’s asset purchases “did not dilute its balance sheet and hence, did not compromise on core principles of central banking.”
The purchases were risk-free government bonds only, he said.
“The focus was to foster congenial financing conditions without jeopardising financial stability,” Das said in his keynote address at the foundation day of the Bombay Chamber of Commerce.
In this period, forward guidance gained prominence in the Reserve Bank’s communication strategy to realise co-operative outcomes, he said, adding, the central bank will “continue to support the recovery process through the provision of ample liquidity in the system, while maintaining financial stability.”
The 10-year bond yields remained flat before and after the speech at 6.16 per cent.
The RBI governor, in the question and answer session after the address, said “a lot is going on internally” with regards to a central bank digital currency. The RBI will come out soon with some broad guidelines and approach “very shortly.” However, there are a few issues that need to be sorted out internally and it is a work in progress.
“We don’t want to be left behind in this technological revolution that is taking place. We need to get two aspects right. One aspect is the technology part of blockchain, the benefits of which needs to be capitalised. The other aspect is central bank digital currency,” the governor said.
However, on cryptocurrency, the central bank does have some concerns that have been addressed to the government, the governor had said in the past.
The RBI governor said high fuel prices “do have an impact on the cost side, and they act as a cost push factor across a range of activities.” It is not just passengers who are impacted, high petrol and diesel prices impact the cost of manufacturing, transportation and other aspects.
“So, there is a need for a coordinated action between the centre and the states. There are indirect taxes by the centre and the states. And there is a need for coordinated action, and a coordinated and calibrated reduction of taxes,” the governor said. in the question-and-answer round after his address.
While there is a need for higher taxes for revenue augmentation, the impact on inflation has to be considered. “I’m sure, going forward, governments will take some positive decisions in a coordinated manner (with regard to the fuel prices), ” the governor said.
The proposed ‘bad bank’ or asset reconstruction company (ARC) being floated by banks will “in no way jeopardise the activities of the existing ARCs, I think there is scope to have one more strong ARC formed by the banks,” the governor said.
The central bank is focused on the regulatory framework on ARCs, and will come up with an upgraded regulatory architecture for the ARCs, to ensure they have “a skin in the game and they are very much in business.” The idea of setting up a new ARC, even as it was announced in the Union Budget, has really come from public sector banks, the governor said.
The RBI is up to date with large exposure and its supervisions have improved on banks with regards to stressed assets.
Evergreening of loans has remained a focus area with the central bank and Indian banks are now in a much better shape, the governor said.
“We are constantly engaged with both public and private sector banks to deal with this issue. The key is to improve governance in banks,” Das said.
The RBI does not interfere in the lending decisions of banks, but the central bank has ensured that the rupee remains in a narrow band.
“RBI’s responsibility is to ensure that there is stability of the exchange rate, and our focus is always to prevent undue volatility, so that the exporters, or even the importers and other businesses, can make informed decisions.”
“RBI’s policy is to prevent excessive volatility. Once we prevent excessive volatility, I think the concern of every sector, including the MSMEs (micro, small and medium enterprises) would be addressed,” according to Das.