Low-interest rates & enormous liquidity are a concern, says Ex-RBI Governor D Subbarao

On Thursday, former Reserve Bank of India Governor D Subbarao expressed concern that today’s low-interest rates and massive liquidity in the system could jeopardize financial stability.

Subbarao said at a conference here that the challenge for central banks including the Reserve Bank of India was to juggle maintaining price stability, promoting growth and employment, and keeping financial stability in a globalized world.

He delivered such remarks during the 12th annual Union Bank Finance Conference organized by the Great Lakes Institute of Management.

“Today, the Reserve Bank of India maintained an extraordinary policy for the last two years since Covid-19 affected the country and that has been very necessary and RBI has been taking the right stance and it has been instrumental in keeping the economy go ahead,” he said.

“The concern today is that the low-interest rates and enormous liquidity available in the system are actually could potentially disrupt financial stability”, he added.

“It happens because if there is too much money going around in the system and people do not have opportunities to get appropriate returns…,” he stated.

In a globalized context, the Reserve Bank of India must balance the three objectives of maintaining price stability, boosting growth and employment, and keeping financial stability, and this is a monetary policy issue, he added.

Maintaining that communication holds significance for Central Banks, he said, “after 9/11 when the twin towers in America were hit, the Federal Reserve System issued a statement saying it is open and operating.. this is an ordinary statement. However, this is a major statement in the financial market.”

He noted that central banks had previously been ‘reticent’, but that this had altered in the last 15 years, with the rule that they should not communicate until required, as speaking was not only useless but also counterproductive.

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