Financial stability a key metric for monetary policy now: Shaktikanta Das

Financial stability has emerged as a key consideration for monetary policy formulation in the post-2008 financial crisis world beyond the imperatives of inflation and growth, Reserve Bank Governor Shaktikanta Das said on Monday, June 17. A healthy financial sector is a pre-requisite to improve growth prospects, he said, and expressed confidence that the end of political uncertainty with the recent polls and continuation of economic reforms may lead to a reversal of the current weaknesses.

The comments come amid a slew of troubles plaguing the NBFCs which account for a fifth of the credit market. The central bank is taking a "fresh look" at shadow banking regulation and supervision, and is also monitoring the activities of large NBFCs with a view to ensure financial stability, Das said.

He said while a "delicate balance" is necessary between inflation and growth in setting the monetary policy in a flexible inflation targeting framework like the one we adopted since the past two years, financial stability is also important in the present context. "Financial stability has emerged as another key consideration for monetary policy, though the jury is still out as to whether it should be added as an explicit objective of monetary policy," Das told a group of senior IAS officers at the Lal Bahadur Shastri National Academy of Administration in Mussoorie.

READ: RBI Policy Review: Here's Where RBI Governor Shaktikanta Das Has Pegged India's Inflation Trajectory And Outlook For 2019-20

"The fact remains that though the focus of the monetary policy is mainly inflation and growth, the underlying theme has always been financial stability," he stressed. The RBI will focus on effective communication and coordination to "achieve broader macroeconomic objectives of price stability, growth and financial stability," he said, adding a healthy financial sector is a must to "reinvigorate" the sagging growth by improving the investment climate.

Das said the Reserve Bank has accorded high policy attention to reform both banking and non-banking sectors, and exuded confidence that the new NPA guidelines will "sustain the improvements in credit culture." On the crisis-hit NBFC sector, he said RBI has issued draft guidelines for liquidity framework and is "taking a fresh look at their regulatory and supervisory framework". "It is our endeavour to have an optimal level of regulation and supervision so that NBFCs are financially resilient and robust," he said and reiterated that RBI will not hesitate to take any step to maintain financial stability.

The governor also said a number of steps were taken to improve the commercial viability of urban co-operative banks like a proposal to establish an umbrella organisation and a centralised fraud registry for them and governance reforms. "We are also encouraging voluntary merger and consolidation in the sector to help reduce operating costs, diversify risks and economise on capital," he added.

Pointing to the 2013 taper tantrum experience, he said market volatilities in emerging markets could have been avoided through clear advance communication on calibrated withdrawal of monetary policy accommodation. Das said even after more than a decade since the global financial crisis and six years after the taper tantrum, the "global economy is still not on a stable growth path." "India has continued to exhibit robust growth driven by consumption and investment demand in recent past. However, we have seen a loss of speed since the second half of FY19 as some drivers of growth, notably investment and exports, slowed down," he said, adding an activity in agriculture and manufacturing moderated sharply.

It is expected that the end of political uncertainty associated with an election season and the continuation of economic reforms would lead to a reversal of the current weaknesses in some of the indicators in our economy.