The Reserve Bank of India (RBI) Governor Sanjay Malhotra said on November 20 that focusing only on short-term economic growth at the cost of financial stability can create much bigger problems for the country in the long run. While speaking at the VKRV Rao Memorial Lecture in Delhi, Malhotra explained that:
Short-Term Growth vs Long-Term Stability
- Short-term growth can be achieved even if financial stability is compromised.
- But financial instability can cause deep and long-lasting losses, much larger than the temporary benefits of fast short-term growth.
- Therefore, financial stability must remain the foundation of all economic and monetary decisions.
Financial instability means a situation where a country’s financial system — including banks, markets, and money flow — becomes weak, unpredictable, or stressed, making it difficult for the economy to function smoothly. Financial instability happens when the financial system is not stable and starts showing problems that can hurt people, businesses, and the entire economy.
Other Important Responsibilities of RBI
Malhotra said that besides financial stability, the RBI also focuses on:
- Prudential requirements such as:
- Liquidity norms
- Capital requirements
These ensure that financial institutions remain safe and strong for all stakeholders.
- Conduct and consumer protection measures
This includes:- Protecting customers
- Enforcing good behaviour in financial institutions
- Supporting investigations related to money laundering, which he said remains an important concern.
RBI’s Regulatory Approach: Hybrid Model
The Governor clarified that RBI follows a hybrid regulatory system:
- The central bank is slowly moving towards a principle-based regulation, which focuses on broad principles and flexibility.
- At the same time, it continues to keep some rule-based regulations, which are specific, measurable, and clearly defined.
He explained that:
- Rule-based regulation uses strict, quantitative rules that everyone must follow.
- Regulation helps protect consumers and maintain stability, but regulations also come with a cost.
- “There are no free lunches,” he said, meaning that financial safety measures may slow certain activities but are essential for the economy.
Indian Rupee: RBI Does Not Target Any Specific Level
Speaking about the Indian rupee’s recent depreciation, Malhotra clarified:
- RBI does not target any fixed exchange rate level for the rupee.
- The recent fall in the rupee is mainly due to:
- Uncertainty in global trade
- A rise in demand for the US dollar
- He said India’s foreign exchange reserves are strong and the RBI is confident things will improve once global trade conditions stabilise.
Malhotra said India is likely to benefit from good trade agreements, which should reduce pressure on the current account deficit. He emphasized that maintaining long-term financial stability is essential for sustained economic growth.
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