Former Reserve Bank of India Governor D Subbarao on Thursday said the concern today was that the low interest rates and the enormous liquidity available in the system could potentially disrupt financial stability.
The challenge for central banks and for the Reserve Bank of India was to juggle between maintain price stability, supporting growth and employment, preserving financial stability and all this in a globalised world, Subbarao said at a conference here.
He made those comments at the 12th annual Union Bank Finance Conference organised by Great Lakes Institute of Management here.
"Today, the Reserve Bank of India maintained extraordinary policy for the last two years since Covid-19 affected the country and that has been very necessary and RBI has been taking right stance and it has been instrumental in keeping the economy go ahead," he said.
"The concern today is that the low interest rates and enormous liquidity available in the system is actually could potentially disrupt financial stability", he said.
"It happens because if there is too much money going around in the system and people do not have opportunities to get appropriate returns...," he said.
The Reserve Bank of India has to juggle between the three of the objectives
--- maintain price stability, supporting growth and employment, preserving financial stability --- in a globalised environment and that is a challenge of monetary policy, he said.
Maintaining that communication holds significance for Central Banks, he said, "after 9/11 when the twin towers in America were hit, the Federal Reserve System issued a statement saying it is open and operating.. this is an ordinary statement. But for financial market this is a significant statement."
Noting that the central banks were 'reticent' in the past, he said this changed in the last 15 years and the dictum was that the central banks should not communicate unless necessary since speaking was not only unnecessary but also counter productive.
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