In the current coronavirus pandemic, the Reserve Bank of India (RBI) is successfully navigating policy quadrilemma by building foreign reserves, monetary independence, financial openness and financial stability, say economists at State Bank of India.
According to the latest SBI Ecowrap report, the recent policy statements of the central bank have repeatedly emphasised the importance of financial stability in monetary policy making, while stress on financial openness led to jump in forex reserves. As a result, India's international reserves to GDP ratio increased sharply from 17.7 per cent of GDP to at least 19.6 per cent on an FY20 base, registering a $63.8 billion jump.
As per the SBI report, monetary independence (MI), which implies loss of monetary autonomy, was at significantly low level in Q4 FY20 (all time low since 1997), when the pandemic had just started and India went into a strict lockdown mode. However, it improved significantly in Q1 FY21 with exchange rate stability (ERS) returning to markets. Adding to it, both ERS and financial openness index (KO) also improved in Q1 FY21 after falling in Q4 FY20.
"In the current pandemic, the RBI stands out by achieving comparable levels of exchange rate stability amidst growing financial openness while increasing its monetary independence and even financial stability, reminiscent of Asian economies," the report said.
The SBI financial stability index also showed that the central bank of India has been relatively successful in ensuring financial stability returning to market since May, which signals the policy quadrilemma is working well in Indian context.
The SBI report also opined that the current RBI policy of liquidity overhang is working well as it tends to prevent more strongly an exchange rate appreciation than exchange rate depreciation.
Going forward, the agency expects that the RBI may need to further resort to unconventional policies as it has been successfully doing.
The central bank has taken a slew of liquidity measures to support business and economy during the COVID-19 crisis. With various liquidity measures, the system liquidity position has turned to surplus of Rs 5 lakh crore in May, as against Rs 3 lakh crore in March. Currently, it stands at Rs 2.7 lakh crore till September 17, 2020. The gross borrowing of the Centre and states stood at Rs 21.6 lakh crore, with net borrowing at Rs 17.9 lakh crore.
By Chitranjan Kumar