The Reserve Bank of India (RBI) is the central bank for India. The RBI handles many functions, from handling monetary policy to issuing currency. India has reported some of the best gross domestic product (GDP) growth rates in the world. It is also known as one of the four most powerful emerging market countries, collectively part of the BRICs which contain Brazil, Russia, India, and China.聽
The International Monetary Fund (IMF) and World Bank have highlighted India in several reports showing its high rate of growth. In April 2019, the World Bank projected India鈥檚 GDP growth would expand by 7.5% in 2020锘军/span>锘? Also in April 2019, the IMF showed an expected GDP growth rate of 7.3% for 2019 and 7.5% for 2020. 锘军/span>锘緽oth projections have India with the highest expected GDP growth in the world over the next two years.
- Projections for India to have the highest GDP growth in 2019-20 have placed a spotlight on the Reserve Bank of India (RBI), the central bank of the sub-continent.
- India has several unique challenges ahead that will require nimble navigation from the RBI.
- RBI's recent moves include cutting interest rates and banning dealings in cryptocurrencies, along with getting a new head, Shaktikanta Das.
India鈥檚 Growth 锘军/strong>
The above growth rates make the role of the Reserve Bank of India increasingly important as the country鈥檚 total GDP moves higher. India is a top 10 nation for GDP overall but its numbers fall far behind the world鈥檚 superpowers in the U.S. and China.
India is expected to have a GDP of $2.935 trillion and $3.304 trillion in 2019 and 2020, respectively. This compares to expectations of $21.506 trillion and $22.336 trillion for the U.S. China鈥檚 expected GDP for the same time periods is $14.242 trillion and $15.678 trillion.
The RBI and Economy
As with all economies, the central bank plays a key role in managing and monitoring the monetary policies affecting both commercial and personal finance as well as the banking system. As GDP moves higher in the world rankings the RBI鈥檚 actions will become increasingly important.
In April 2019 the RBI made the monetary policy decision to lower its borrowing rate to 6%.锘军/span>锘 The rate cut was the second for 2019锘军/span>锘 and is expected to help impact the borrowing rate across the credit market more substantially. Prior to April, credit rates in the country had remained relatively high, despite the central bank鈥檚 positioning, which has been limiting borrowing across the economy. The central bank must also grapple with a slightly volatile inflation rate that is projected at 2.4% in 2019, 2.9% to 3% in the first half of 2020, and 3.5% to 3.8% in the second half of 2020.
The RBI also has control over certain decisions regarding the country鈥檚 currency. In 2016, it affected a demonetization of the currency, which removed Rs. 500 and Rs. 1000 notes from circulation, mainly in an effort to stop illegal activities. Post analysis of this decision shows some wins and losses. The demonetization of the specified currencies caused cash shortages and chaos while also requiring extra spending from the RBI for printing more money.
In 2018, the RBI banned the use of virtual currencies by the financial agencies and banks that it regulates.
One of the biggest advantages, however, was the increase in tax collection, which resulted from greater consumer reporting transparency.
In December 2018, Shaktikanta Das was appointed the new RBI governor. Das is a supporter of demonetization inline with the top government officials鈥 views. Das is also expected to better align with India鈥檚 government leadership and amicably support better access to credit.
The Bottom Line
As one of the fastest-growing emerging market countries in the world, India has several unique challenges ahead that will require nimble navigation from the RBI. Shaktikanta Das will be charged with guiding the monetary policy direction over the next three years for the country as it continues to take the spotlight for GDP growth.聽
India also has a diverse range of goods and services along with a rising inflation rate. With the Indian economy steadily accounting for a greater share of the global economy, it is expected that the RBI will gain greater attention from world leaders while also growing in stature as one of the world鈥檚 most-watched central banks.