Reserve Bank of India Governor Shaktikanta Das on Friday said any fiscal or monetary expansion cannot be unbridled as it could lead to a situation like ‘chakravyuh’. He also divulged that the government and the central bank are in discussion with some countries for cross-border trade in Indian rupee.

“I am not a believer in modern monetary theory. Any fiscal expansion, any monetary expansion has to be calibrated, has to be targeted and cannot be unbridled. So, that is our view in the Reserve Bank and that’s my view also,” Das said in his keynote address at an IMF conference.

Unconventional monetary policy refers to what the RBI has done, specifically in the last three years of the Covid-19 pandemic, Das said. “When we went for rate reduction, reduction of policy rate and liquidity expansion, our liquidity expansion was again, not unbridled. It was calibrated and targeted in most cases with specific sunset clause — that is end dates,” he said.

Citing the instance of long-term repo operation (LTRO) — which provides liquidity for 1-3 years at a rate equal to one day repo — he said it was targeted at certain NBFCs which had a liquidity crisis and in another circumstance, to relieve the anxiety of the mutual funds segment. “Therefore, all the liquidity expansion that we did ... were given out for one/three years, and most of it has come back in that one/three-year window. Whatever is left behind, will come back in March 2023,” he said.

“Such a mechanism has enabled us to deal with the problem of pulling out the liquidity. It’s very easy to inject liquidity, but difficult to pull it out. We did not want to find ourselves in the ‘chakravyuh’ situation,” he said.

Rupee settlement

The Governor also said the government and the central bank are in discussions with South Asian countries to have cross-border trade in Indian rupee. “The RBI, together with the Government of India, have initiated rupee settlement of international trade. We are already in discussion with some of the countries in this region and to facilitate rupee settlement for cross-border trade in the South Asian region,” he said without divulging the name of the countries.

Cautious on CBDC

On the launch of the Central Bank Digital Currency (CBDC), Das said the RBI is moving “very carefully and cautiously”. The central bank had launched a pilot project of digital currency for wholesale transaction (CBDC-W) on November 1 and for retail transaction (CBDC-R) on December 1.

“It’s in a trial phase; we are moving about it very carefully and cautiously. If there is cloning or anything which happens, it can be very risky... so that could be another area where there can be room for cooperation (among South Asian countries),” Das said.

The use of the digital rupee is expected to make the inter-bank market more efficient, as settlement in central bank money will reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk, the RBI had said while launching the pilot.

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