Sunday, December 7, 2014

Macro-prudential Policies – Need of an hour!!

Lessons from the recent financial crises put emphasis on the literally adverse and chaotic situation that can arise yet again, if not paid any attention to the cyclical irregularities that emerge in the global financial system. It has been more than six years now and can see a light at the end of the tunnel. United States is on a verge of recovery, unemployment rate is at six years’ low, at around 5.8%, GDP growth is back in the rage of 2.3-3.5% QoQ. Earnings of the people participating in the labour market are also growing a tad and that is encouraging.

One can take a sigh of relief that atleast we have a recovery now(only from the largest economy’s point of view), though it was inevitable, but are we prepared now for another global financial dent? Do we have a cushion (in terms of stress tests undertakings, reserved capital and equity to sustain any sort of financial aberrations) yet to sustain? Here, Macro-prudential policies come handy. Worldwide monetary policies do provide a direction to sustainability, in terms of coping with an unexpected event (read, Quantitative easing) but can there be a prudential policy in place, which can act as a bulwark for the financial system against any unprecedented crises. This is exactly what Governor Lael Brainard (At the Hutchins Center on Fiscal and Monetary Policy, The Brookings Institution, Washington, D.C.) reiterated in her address on 4th December, 2014). She has also focused on the in tandem usage of both monetary policy and macro-prudential policies for safeguarding the globally linked financial market.

Reserve Bank of India has also accepted that it is the Macro-prudential tools which are necessary today for keeping the financial institutional network intact. Urjit Patel’s report also reiterates the same view and hence stressing the importance of prudential tools. The steps taken for these policies are charted of by the Implementation of Basel III Capital Regulations in India. As per RBI’s notification of March,2014, the transitional period for full implementation of Basel III Capital Regulations in India is extended upto March 31, 2019, instead of as on March 31, 2018. This will also align full implementation of Basel III in India closer to the internationally agreed date of January 1, 2019.

Indian Banks are to be capitalized with clear charted way out for enough equity and liquidity capital essential to wither away any crises where survival becomes essential. And to make this a reality, Central bank and the Government need to work hand in hand. But, the way our political decision making process is undergoing a drastic change, we hope that the new government becomes a little prudent and start charting out plans for 2019. The political juggernaut which is being witnessed these days in the parliament with regards to the Hate Speech is something which is not accepted. The entire political fraternity should take responsibility and let the nation move forward. These small political incidents should not abandon the path for a stronger financial stability.