For a long time, erroneously, it was felt that ‘strategy’ or ‘vision’ documents belonged exclusively to the domain of corporate boardrooms or business school classrooms. As the world becomes more complex and layered, everyone needs a strategy, including central banks. Financial systems in almost all economies have become overly elaborate, complex and tangled; This requires central banks to detect early signs of financial instability that can originate anywhere in the system and be contagious. The second layer is the effect of fiscal policy on the economy; In India, we have the complication of the Reserve Bank of India (RBI) mandated to sell government bonds. Furthermore, a globalized world requires central banks to monitor foreign exchange flows and manage currency-rate volatility. The topmost layer involves looking at the monetary dynamics of the economy, especially the often tricky balance of price stability and growth. This is a very complex task and the RBI has done the right thing by creating a formal medium-term strategy document. It’s better than managing by the seat of one’s pants, or even annual plans. Nevertheless, two areas in the RBI’s strategy document for 2023-25, Utkarsh 2.0Calling for improvement.
The document would have been far more useful and probably yielded better results, if it had sought to narrow down the specific challenges and had a detailed plan on how the RBI proposes to address them. As the world moves towards a new global order, central banks may face an increasing number of curve balls. Under these circumstances, it must have concrete proposals to prepare itself for the impending churn in the prevailing systems. For example, the main objective outlined in Utkarsh 2.0 is a reworked version of the Preamble to the Reserve Bank of India Act, which was amended in 2016 and replaced as a precursor to the formal adoption of the flexible inflation targeting regime by the RBI. went. Many of the specific strategy points mentioned are also important to expect the central bank to discharge anyway. For example, Strategy No. 9 in Vision-I (Excellence in the Performance of its Functions) states: “Create a resilient financial intermediation ecosystem; refining the regulatory and supervisory framework for its stronger and stronger sustenance.” It is more of an objective, a desirable end-result, than a strategy; ideally, a strategy describing a path to achieve it Here is another example from Strategy No. 8. For Vision-II (Strong Confidence of Citizens and Institutions in Reserve Bank of India): “Ensuring strong and comprehensive internal and external RBI policies.” While it may be unfair to expect a currency strategy reveal, the central bank would benefit from shedding some light on how it expects to achieve its ambitious plans.
other major differences in Utkarsh 2.0 Its notable absence is climate finance or green central banking. This is strange, given that they are bound to change risk and financing methods in order to meet their nationally determined contributions to the globally coordinated effort to stop global warming. According to current calculations, this portends a step change in the central bank’s risk management approach and will call for some overhaul of its existing strategy framework. The RBI should be mindful of the broad outlook that its strategy document suggests. Some candor with the public and a feedback loop would have helped our central bank arm better insulate against future uncertainties.
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