Mumbai, Oct. 22: The Reserve Bank of India today said it faced a tough challenge ahead while choosing between growth and financial stability — the comment succinctly summing up the dilemma before the central banks mandarins when they hunker down on October 27 to review the monetary policy.
In its report on Trend and Progress of Banking in India 2008-09, the RBI said the banking system had proved to be resilient in the face of the global financial crisis and had even notched up improvements in several prudential parameters.
The report said this reflected the soundness of the RBIs regulatory and supervisory policies. But the central bank said it faced a major challenge as it sought to manage the trade-off between growth and stability.
For instance, the RBI has used various prudential measures such as tightening of risk weights. However, such measures could temper the flow of credit to certain sectors. As a result of the tough regulatory supervision, banks have improved their capital adequacy ratio, enhanced their return on assets and increased productivity.
The RBI said the other big challenge was to manage the governments massive borrowing programme. This is because rising bond yields could scupper its intention to create a low interest regime.
The major challenge that confronts the Reserve Bank in the medium term is to manage the government borrowing programme in a non-disruptive manner… the hardening of yields will go against the spirit of a low interest rate regime that the economy requires in the current situation to revive economic growth, it said. It may be recalled that the government is planning to borrow over Rs 4.50 trillion this fiscal.