Former Reserve Bank of India Governor D Subbarao said on Thursday that today’s fear was that low interest rates and huge liquidity available in the system could potentially disrupt stability financial. The challenge for central banks and for the Reserve Bank of India was to juggle between maintaining price stability, supporting growth and employment, and preserving financial stability and all this in a globalized world. , Subbarao told a conference in Chennai.
He made the comments at the 12th Annual Union Bank Finance Conference hosted by the Great Lakes Institute of Management here. “Today the Reserve Bank of India has maintained an extraordinary policy over the past two years since COVID-19 affected the country and it has been much needed, and RBI has taken the right stance and helped maintain the ‘economy on the go’, he said.
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“The concern today is that the low interest rates and huge liquidity available in the system could actually potentially disrupt financial stability,” he said. “It happens because if there’s too much money flowing through the system and people don’t have the opportunity to get proper returns,” he said.
The RBI has to juggle between maintaining price stability and preserving financial stability in a globalized environment and that is a monetary policy challenge, he said. Arguing that communication is important for central banks, he said: “After 9/11 when the US Twin Towers were hit, the Federal Reserve issued a statement saying it is open and operational. That is an ordinary statement. But for the financial market, it was an important statement.”
Noting that central banks had been “reluctant” in the past, he said that had changed in the past 15 years and the saying was that central banks should not communicate unless necessary because talking was not only pointless but also counterproductive.