ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

Articles By Reserve Bank of India

The Reserve Bank of India’s Trilemma Choice

The Reserve Bank of India, like most central banks, has to choose between the three corners of the impossible trinity, that is, free capital flows, monetary policy independence and exchange rate stability. This article uses the Aizenman et al (2008) framework to analyse the trilemma choice of the RBI over 2000–22. The results provide interesting insights into the RBI’s shifting position in managing the impossible trinity over the years.

Role and Impact of Inflation Targeting Regime on Households’ Inflation Expectation

The inflation targeting regime has almost no impact on households’ inflation expectation formation. The article finds a very high correlation between the three–month ahead households’ IE and current inflation perception. It argues that the IE majorly depends on households’ realisation of current inflation, providing very less space for other factors, like regime shift to IT. It further questions the fundamental need of awareness regarding the IT regime for it to affect the IE formation among households.

RBI’s Scale-based Regulations for NBFCs

Certain issues regarding the scale-based regulation framework for non-banking financial companies laid out by the Reserve Bank of India are scrutinised. These pertain to divergence with globally adopted definition of systemically important and differences in the usage of two literally identical terms, namely systemically important and systemically significant, by the RBI, coupled with irregularities in the measurement of perceived riskiness, the adoption of the binary concept rather than the continuum concept of systemically important NBFCs with regard to top 10 asset size-based inclusion in the upper layer, inclusion of systemically significant NBFCs for a minimum period of five years, supervision on calibrated increment of business, and the relevance of the top layer.

 

To Regulate or Strangulate?

A critique aspect of the current regulatory framework for non-banking financial companies by the Reserve Bank of India shows that such regulations would stymie the growth of NBFCs, constricting their lending ability that has been affected by the pandemic. What is needed is regulation through incentives instead of the threat of penalisation.

RBI’s ‘Financial Stability Reports’ and Stress Testing Methodologies

Analysing the contents of the Reserve Bank of India’s biannual FSRs and the methodology of the RBI’s supervisory stress tests reveals that there is scope for improvement, specifically regarding the continuity in the tracking of certain risk drivers, the extent of commentary on the information, and aspects of stress tests. Improving on these, along with disclosing results of individual banks’ stress tests, would aid in enhancing transparency and inspiring confidence in the financial system.