Shaktikanta Das: India - a story of resilience
Inaugural address by Mr Shaktikanta Das, Governor of the Reserve Bank of India, at
the Annual Financial Institution Benchmarking and Calibration (FIBAC) 2022
Conference, organised jointly by the Federation of Indian Chambers of Commerce and
Industry (FICCI) and the Indian Banks' Association (IBA), Mumbai, 2 November 2022.
* * *
I am happy to have been invited to this Annual FIBAC 2022 Conference. This is an
important forum for industry stalwarts, banking practitioners, thought leaders and
policymakers to brainstorm on emerging issues. This conference is being held at a time
when the global economy is going through a process of churning. Triple shocks of
COVID-19, war in Ukraine and the current financial market turmoil have created a toxic
mix of factors and circumstances which every country has to grapple with. The
International Monetary Fund (IMF), in its recent Annual Meeting, has presented a rather
sombre outlook for the world economy with downward revisions of global growth and
trade. The existing international order is undergoing fundamental shifts in terms of
geopolitics and economic relationships.
2. This confluence of factors and circumstances is reverberating speedily across
countries and jurisdictions. With monetary policy actions and stances undergoing a
regime shift in the advanced economies (AEs), financial conditions have tightened
sharply across markets and have accentuated financial stability risks. Emerging market
and developing economies (EMDEs), in particular, remain highly vulnerable to these
global spillovers. Capital outflows have led to reserve losses, sharp currency
depreciations and spiralling imported inflation pressures. Several countries face acute
debt distress, while many others are confronted with elevated food and energy prices.
Conventional and technocratic policy making is increasingly getting challenged by
unconventional and 'out of box' approaches.
3. In this unsettling global environment, the Indian economy has been growing steadily,
drawing strength from its macroeconomic fundamentals and buffers. According to the
IMF, India is slated to be one of the fastest growing major economies of the world in the
current year as well as in the next year. Our recovery and growth have been more
broad-based. Our policies - fiscal, monetary and regulatory - were prudent, targeted
and time-bound. We were careful to ensure that demand remained in balance while
supply conditions improved. As per the high frequency indicators (HFIs) for the recent
months, private consumption - especially urban demand - has remained healthy. The
contact-intensive services have continued to make smart rebound, aided by unfettered
resumption of activities and full-fledged celebration of festivals after two and half years.
External demand, however, remains a weak spot in the face of accentuating global
economic slowdown.
4. Domestic Inflation remains elevated. We are closely monitoring the inflation trends as
well as the effect of our past actions. In our view, price stability, sustained growth and
financial stability need not be mutually exclusive. In the Mahabharata during the famous
Swayamvara when the great warrior Arjuna aimed at the eye of the revolving fish
through the pool of water below, he would have certainly assessed the speed at which
the fish was revolving, the wind conditions, the intensity of the ripples in the pool of
water, the noise levels in the King's court and similar other factors. No one can match
the prowess of Arjuna, but our constant endeavor is to keep an Arjuna's eye on
inflation, which is our primary target. At the same time, we keep assessing other related
factors like the evolving inflation-growth dynamics; soft indicators like our surveys on
consumers and businesses; global macroeconomic, financial and commodity market
developments; and financial stability. In other words, our policy measures are based on
an assessment of the overall situation. We will continue to steer our policies accordingly.
5. In this direction, our continued effort is to put in place strong institutional frameworks
to ensure a sturdy and resilient financial system that would be ready for the challenges
in the future. Let me highlight the major elements of this approach and our future path in
five specific areas.
I. Monetary Policy Framework and Price Stability
6. Over the last three years, we have utilised the flexibility in the monetary policy
framework to calibrate our actions to counter the adverse effects of COVID-19 and
other international factors like the war in Ukraine. We have refined our inflation
forecasting methodology by incorporating new techniques and are delving deep into the
granularity of inflation projections. We have augmented our baseline quarterly
projection model (QPM) with satellite models. We are also exploring techniques
spanning new and diverse fields such as data science (DS), machine learning (ML) and
night-time luminosity.
7. Liquidity management constitutes an important aspect of the operating framework of
monetary policy. A revised liquidity management framework was thus instituted by the
RBI in February 2020. In April 2022, significant changes were instituted in the operating
procedure of monetary policy through the introduction of the standing deposit facility
(SDF) as the floor of the LAF corridor. The SDF rate is applicable on uncollateralised
1
overnight deposits and would act as a financial stability tool .
8. Projections of currency in circulation (CiC) also constitutes a key element of our
liquidity management operations. Since currency in circulation drains out liquidity from
the banking system, projections of its future levels are typically used as an input to
finetune the volume of central banks' market operations.
9. A significant technological innovation in the RBI's liquidity management operations
has been the introduction of the automated sweep-in and sweep-out (ASISO) facility.
The ASISO facility was introduced by the Reserve Bank in its e-Kuber system in August
2020. Consequently, the banks are now able to set the amount that they wish to keep
as balances in their current accounts with the Reserve Bank at the end of the day.
Depending upon this pre-set amount, marginal standing facility (MSF) and standing
deposit facility (SDF) bids, as warranted, are auto generated at the end of the day.
10. Further, as you are aware, the RBI is currently working towards a phased
implementation of the Digital Rupee (e). Yesterday (1st November, 2022), we have
started our pilot project on wholesale CBDC. We propose to commence the pilot project
for retail CBDCs shortly.
II. Strengthening the Regulatory Framework of Banks, NBFCs, UCBs,
Payment Systems and ARCs
11. The global shocks and turmoil over the last three years did not distract us from our
overarching goal of strengthening the resilience of the financial system and reinforcing
financial stability. Throughout this entire period, we worked tirelessly and have
introduced fresh guidelines in several areas. These include issuance of guidelines on
governance in commercial banks in April 2021; a steady-state prudential framework for
resolution of stressed assets in June 2019; securitisation of standard assets in July
2021; Scale Based Regulatory (SBR) framework for NBFCs in Oct 2021; revised
regulatory framework for Urban Cooperative Banks in July 2022; guidelines on Digital
lending in September 2022; revised guidelines for ARCs in October 2022; and issuance
of discussion paper on Climate Risk and Sustainable Finance in July 2022.
12. The RBI has been ahead of the curve in creating an institutional architecture for
new financial products and services. Peer to peer (P2P) lending, account aggregator
(AA) framework, Unified Payments Interface (UPI), Trade Receivables Discounting
System (TReDS) and allowing NBFCs to offer credit services over digital only platforms
are instances of regulation helping the industry to grow in a systematic manner.
Customer centric initiatives, such as Online Dispute Resolution (ODR), Integrated
Ombudsman Scheme, Retail Direct Scheme for G-Sec investors, contactless and
offline payments, Payments Infrastructure Development Fund (PIDF) framework, card
tokenization and e-mandates for recurring transactions have also been introduced in
the recent period. We have also instituted a Regulatory Sandbox as well as an
InterRegulatory and Inter-Operable Regulatory Sandbox for testing hybrid products.
III. Deepening Supervisory Framework
13. Supervision of banks, NBFCs and other financial entities in the RBI's regulatory
domain is a very critical segment of the RBI's functioning. A great deal of work has
been done in the recent years to deepen and sharpen our supervision. The thrust is
now focussed more on identification of root causes of vulnerabilities in financial
institutions and taking suitable measures for mitigation.
14. Analytical capabilities are being enhanced by leveraging advanced technologies
such as artificial intelligence and machine learning (AI/ML). The data capabilities are
also being upgraded.
15. The RBI remains vigilant about unsustainable growth, if any, in financial entities
including risks emanating from technological developments. The recent guidelines on
digital lending underscore the importance of facilitating responsible financial innovation.
Additionally, the challenges relating to cyber risk and climate related financial risks are
getting appropriate policy focus.
16. Let me sum up this segment of my speech by stating that India's banking system is
well positioned to support economic growth with bank credit growing in double digits
after a long hiatus. The RBI remains focused on fortifying the financial system against
sudden shocks and ensuring macroeconomic and financial stability.
IV. Developing Financial Markets
17. The development of financial markets has been a key priority for the RBI. We have
been undertaking calibrated reforms to develop vibrant and resilient financial markets.
These reforms, among other things, seek to remove market segmentation, facilitate
access including access for non-residents, widen the participation base, promote
innovation, and ensure customer protection. A few examples would be worth
highlighting. Simplified principle-based regulatory frameworks for governance, risk
management, customer suitability and appropriateness in interest and forex derivative
markets were issued during 2019-2021. Banks were permitted to access the offshore
forex derivative markets in 2020 and offshore foreign currency settled rupee derivatives
market in February 2022. These measures will deepen the forex and interest rate
derivative markets in the country, remove the segmentation between onshore and
offshore markets, and improve the efficiency of price discovery.
18. Measures have also been taken to put in place state-of-the-art market
infrastructure. Regulations for electronic trading platforms and financial benchmark
administrators seek to ensure that governance and operating frameworks meet global
standards. Retail participation is sought to be enhanced through operational
convenience and transparency with the Retail Direct Scheme for government securities
and the FX-Retail platform for foreign currency. Other measures include mandating the
use of legal entity identifier (LEI) to improve the quality of financial data systems and
regulations to promote fair market conduct.
V. Payment Systems in India: Interoperability; Cross-border Linkages
and Innovation
19. Payment systems have emerged as a lifeline of our financial system. The RBI's
focus is on promoting interoperability, cross border linkages and innovation. Our
initiatives have ensured the availability of 'anytime and anywhere' payment systems for
the common man at reasonable rates. Interoperability across instruments has resulted
in optimum and efficient use of available infrastructure, reduced cost and increased
convenience.
20. One of the best examples of interoperability is the unified payments interface (UPI)
system. To enable extension of UPI to feature phone users, the innovative UPI123Pay
was introduced. UPI has been recognised as the fastest growing retail payment system
in the world and many countries have expressed interest in a UPI-like platform.
Interlinking UPI with similar fast payment systems in other jurisdictions would help
establish cross-border inter-linkages and facilitate cross-border payments. Together
with the National Payments Corporation of India (NPCI), the RBI's initiatives in Bhutan,
Nepal, Singapore, the UAE and several other countries demonstrate the huge potential
of the UPI in the years to come.
21. 24x7x365 availability of the real time gross settlement (RTGS) and fast payment
systems (UPI and Immediate Payments Service (IMPS)) have placed India in the
forefront among countries. The Bharat Bill Payment System (BBPS) has been enabled
to facilitate cross border inbound bill payments from overseas jurisdictions.
22. The RBI has established the Reserve Bank Innovation Hub (RBIH) for idea
generation and development to promote innovation in the financial sector. The RBIH, in
association with the RBI, is currently undertaking several important projects like
improvements in KYC process and digitisation of rural finance. A pilot project for
end-toend digitalisation of KCC lending has been launched in select districts of Tamil Nadu
and Madhya Pradesh recently.
23. As I proceed to conclude, I would like to touch upon the current liquidity situation
and the exchange rate of the rupee which are attracting considerable attention at
present.
Current Liquidity Situation
24. In the month of October, the interaction of global and domestic developments has
somewhat tightened the liquidity conditions. Average daily absorption under the liquidity
adjustment facility (LAF) amounted to 1.35 lakh crore during the month, down from the
average daily absorption of 2.00 lakh crore in September this year.
25. The tightening of liquidity in October is attributed to several factors. During the
month, currency demand was high on account of the festival season. This constitutes a
leakage of liquidity from the banking system. The RBI's forex market operations, along
with GST and other tax related outflows, also drained liquidity. Banks partially
ameliorated the liquidity stress by drawing down their excess CRR balances and
nonSLR investments. Certain banks also took recourse to MSF.
26. This episode of liquidity strain is likely to be transitory on account of several factors.
First, the leakage due to currency demand will slow down after the festival season; and
as currency returns to the banking system, the system liquidity will improve. Second,
government expenditure is likely to pick up after the monsoon season. Third, the pace
of forex outflows has moderated, which augurs well for system liquidity, going ahead.
Net FPI investments, which were robust in August but turned negative in September,
have resumed in October. Fourth, deposit growth of banks has picked up in recent
fortnights and is working towards bridging the funding gap associated with double digit
credit offtake. Fifth, banks have adequate cushion of SLR to meet any potential liquidity
requirement. In fact, the outstanding absorption of liquidity under the standing deposit
facility (SDF) stood at 84,768 crore on October 31, 2022. The Reserve Bank remains
agile and watchful, continuously monitoring the liquidity situation and is ready to
undertake liquidity operations on either side so that overall liquidity remains adequate to
meet the requirements of the productive sectors of the economy.
Exchange Rate of the Indian Rupee
27. In recent weeks and days, movements in the exchange rate of the rupee (INR) have
been the subject of animated discussion in the media and other fora. Talk of
unidirectional downward descent and the RBI's defence are dominating the narrative in
the public space. It is, therefore, important to address the issue free of emotions and
fully loaded with the facts.
28. On a financial year basis, i.e., from April 1 to October 31, 2022, the INR has
depreciated by 8.0 per cent. Over the same period, the US dollar has appreciated by
13.0 per cent. This holds true even on a calendar year basis, i.e., from January 1 to
October 31, 2022, the INR has depreciated by 9.8 per cent whereas the US dollar has
appreciated by 15.8 per cent.
29. On a financial year basis, almost all major currencies - barring a few like the Swiss
franc, the Singapore dollar, the Russian rubble and the Indonesian rupiah - have
depreciated against the US dollar by more than the INR. In fact, the INR appreciated
against all other major currencies barring of course the US dollar, and a few other
currencies I just mentioned. The size of the INR's appreciation was the highest vis-à-vis
the Japanese yen (12.4 per cent), the Chinese yuan (5.9 per cent), the Pound sterling
(4.6 per cent) and the Euro (2.5 per cent).
30. Cross-country comparisons of exchange rate movements are often made on an
inflation-adjusted basis or what is called in real effective terms. On a financial year
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basis, i.e., between March 2022 and September 2022, the INR has appreciated by 3.7
per cent in real terms even as the Euro, the Japanese yen, the pound sterling and the
Chinese yuan have depreciated. Thus, even in real terms, the INR is the least
misaligned in the face of tsunamis of global spillovers.
31. The story of currency movements following the war in Ukraine is more about India's
resilience and stability in the face of the unrelenting strengthening of the US dollar
rather than a story of weakness.
32. It is important to evaluate these currency movements against the backdrop of global
and domestic macroeconomic and financial developments. Since March 2020, the
world has been buffeted by extraordinary and repetitive shocks. I have spoken of the
pandemic and the war in Ukraine as black swan events. There is yet another shock -
globalised inflation. The most recent shock has been the aggressive and synchronous
monetary policy tightening around the world and the accompanying hawkish forward
guidance. This has pitched the world into a storm. The result has been tightening of
external financial conditions, capital flight from emerging markets, sharp currency
depreciations and reserve losses. No country can be immune to these developments.
Yet the strength of our macro-fundamentals has stood out in comparison with peers,
bearing testimony to prudent macroeconomic policies and the resilience of the buffers
we have built up.
33. An assessment of India's innate strengths can be gauged from a comparison of the
state of the economy today after three years of multiple shocks, with the situation during
the taper tantrum in 2013 when India was labelled as among the fragile five. India's
current account deficit had widened to 4.8 per cent of GDP in 2012-13, clearly above
the sustainable level. Now at 1.2 per cent of GDP in 2021-22 and 2.8 per cent of GDP
in June 2022, it has remained within the sustainability threshold. The ratio of reserves to
total external debt has increased to 95.5 per cent in June 2022 from 71.3 per cent in
2012-13. The debt service ratio (principal repayments and interest payments as a ratio
of current earnings) at 4.9 per cent in June 2022 was lower than 5.9 per cent in
201213. Currently, it is one of the lowest among emerging market peers.
34. Fundamental factors that drive the exchange rate have also moved distinctly in
favour of India since 2013. In 2013, inflation in advanced economies (AEs) was at 1.4
per cent, as against 10.1 per cent in India. The inflation differential of India vis-à-vis AEs
is now negative, a rare development with several AEs experiencing double digit
inflation. India's growth differential with the global economy has improved from 3 per
cent in 2013 to 3.8 per cent in 2022. The corporate sector balance sheets are strong;
the banking system is well capitalised; credit growth is in double digits; and the growth
momentum is steadily improving.
35. The terminal interest rate that the US Fed is targeting is anybody's guess, but it
cannot be the case that it will tighten monetary policy endlessly. When the tightening is
over, the tide will surely turn. Capital flows to India will resume and external financing
conditions will ease. In this complex world in which both push and pull factors are at
play, the INR, which is market-determined, should be allowed to find its level and that is
what we have been striving to ensure. As I have just explained, the INR has seen a
very orderly movement since the onset of the current geopolitical crisis. We must deal
with the global hurricane with confidence, endurance and the courage of our conviction
that we will weather this turmoil.
Conclusion
36. The current global economy is sailing in extremely turbulent waters. Despite
humungous challenges, the Indian economy has progressed relatively well. I would like
to impress upon the banks and businesses to remain focussed on reinforcing their
resilience while continuing to grow and meet market demand. They should continuously
assess the risk buildup, if any, sharpen governance and strive to maintain healthy levels
of capital and other buffers. So far as the RBI is concerned, we remain committed to
support and preserve macroeconomic and financial stability. Once again, it is a moment
of 'whatever it takes'.
1
Besides strengthening the operating framework of monetary policy, the SDF also acts
as a financial stability tool. By removing the binding collateral constraint, the SDF
empowers the RBI to mop up any amount of funds without driving interbank interest
rates to ultra-low levels.
2
Based on BIS real effective exchange rates.