Informist, Monday, Oct. 14, 2024

NEW DELHI – India could leverage its 24X7 real-time gross settlement system and explore the feasibility of using the system to smoothen cross-border trade with various major trade partners, Reserve Bank of India Governor Shaktikanta Das said Monday.

"The feasibility of expanding RTGS to settle transactions in major trade currencies such as the dollar, the euro and the Great Britain Pound (sterling) can be explored through bilateral or multilateral agreements," Das said at the "Central Banking at Crossroads" event in New Delhi.

Such measures offer immense scope in reducing the cost and time taken for remittances, key for emerging market economies like India, the RBI governor said. Remittances offer a starting point to develop peer-to-peer payment solutions, he said. India has already signed bilateral agreements with countries such as Singapore, France and the United Arab Emirates on linking its Unified Payments Interface with systems in those countries. It is also a part of Project Nexus, a multilateral initiative to enable cross-border retail payments by interlinking domestic instant payment systems of four south-east Asian nations and India.

India's highly developed digital public infrastructure has led to the development of various cutting edge financial products that have the potential for cross-border payments, Das said. According to the RBI governor, India's experience can be leveraged by other countries to usher in a "global digital revolution." UPI owner-operator National Payments Corp. of India's international arm has signed agreements with various frontier economies, most recently Trinidad and Tobago, for a UPI-like payments system.

Another key innovation was central bank digital currencies, which could make these payments much easier, Das said. The RBI operates pilots in both retail and wholesale CBDC, with the wholesale pilot launched first in November 2022.

Instead of each country developing such a system independently, the RBI governor proposed developing a plug-and-play system for central bank digital currencies. This could be tailored by each central bank based on domestic factors, maintaining sovereignty, while being underpinned by common principles and interoperability. According to a Bank of International Settlements survey of central banks in 2023, around 94% of the institutions were exploring a central bank digital currency through diverse approaches.

"Going forward, harmonisation of standards and interoperability would be important for CBDCs for cross-border payments and to overcome the serious financial stability concerns associated with cryptocurrencies," Das said.

Das also spoke about the role of new technologies adding to financial stability risks to the global economic system. Of particular note was the risks posed by artificial intelligence and machine learning. Heavy reliance on artificial intelligence may amplify systemic risks if there are any disruptions, as the technology has only a few providers. It introduces new vulnerabilities to the financial system, Das said, including the risk of cyber-attacks and data breaches, and its opacity makes it difficult to audit or interpret. Banks and other financial institutions must take adequate risk mitigation measures, as use of artificial intelligence could have unpredictable consequences in the markets, he said.

With growing digitalisation, risks can spread quickly from rumours and misinformation spreading on social media, leading to potential liquidity stress. Banks must remain alert on social media and strengthen their liquidity buffers, Das said.

"In the ultimate analysis, banks have to ride on the advantages of AI and Bigtech and not allow the latter to ride on them," the RBI governor said.

Das noted that 'low for long' monetary policy during the global financial crisis and then again during the COVID-19 pandemic had led to exuberance in financial asset prices that had "come back to haunt central banks" as they sought financial stability. He referred to global equity sell-offs in recent months, and the collapse of small regional banks in the US in March 2023. Accounting for financial stability, the essential reason for the existence of central banks, during the pursuit of price stability, a more recent objective, was a big question confronting central banks, the RBI governor said.

The divergence in global monetary policy was an emerging risk to financial stability as it leads to volatility in capital flows and exchange rates, Das said. The expansion of private credit markets also threatens financial stability, as these markets are largely unregulated and have not been stress-tested in case of a downturn.

"Stretched asset valuations in some jurisdictions could trigger contagion across financial markets, creating further instability...The interconnectedness between CRE (commercial real estate), non-bank financial institutions (NBFIs), and the broader banking system amplifies these risks," Das said.

Higher interest rates, aimed at bringing down inflation, stress the quality of financial assets and add to countries' debt servicing costs, Das said. Monetary policy actions during COVID-19 have brought accusations of their distributional consequences, though this has not been the case with India as easy monetary policy measures each had sunset clauses, the RBI governor said.

The pandemic-related fiscal stimuli and soaring public debt have become a binding constraint in monetary policy in several countries, with fiscal consolidation not gaining enough traction, he said. The rising debt-GDP ratios in advanced economies have negative spillovers for the broader global economy, with central banks "willy-nilly" expected to finance such huge public debts, Das said.

"In fact, the debt overhang is simmering underneath the radar of central banks, threatening to un-anchor inflation expectations and undermine macroeconomic stability," Das said.

The global economy is more financially integrated than ever before, and the monetary policy actions of systemic economies--such as the US and the European Union--could have an impact on the real economy in emerging market central banks through capital flows, Das said. While larger central banks take decisions based on domestic growth-inflation consequences, emerging economies have to strengthen their frameworks and buffers to mitigate the adverse consequences of those actions. These spillovers may be emphasised by capital flows now dwarfing trade flows, he said.

Despite the trade-offs, central banking is a success story, and it has averted major financial collapses or recessions seen during earlier episodes of crisis, while bringing inflation closer to target, Das said. Now, central banks are also at the forefront of technological innovation, he said.

"Central banks must remain vigilant, adaptable, continuously assess risks and build resilience," the RBI governor said. "They should remain prepared to navigate complex challenges, support sustainable growth, maintain price stability and promote sound and vibrant financial systems." End

Reported by Aaryan Khanna

Edited by Akul Nishant Akhoury

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (11) 4220-1000

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2024. All rights reserved.