Shaktikanta Das says financial stability is the essential reason why central banks exist

Emphasising the indispensable role played by central bankers in the world of finance, RBI Governor Shaktikanta Das said on Monday that financial stability is "the essential reason why central banks exist". Referring to the Global Financial Crisis and the COVID-19 pandemic, Das said that price stability as a central bank objective is "of a more recent vintage". Delivering the keynote address at the High-Level Conference on 'Central Banking at Crossroads' organised in the national capital, the RBI Governor said: "There is a growing opinion today that ‘low for long’ policies practiced during the GFC and again during the pandemic, apart from providing support to the real economy, also produced exuberant financial asset prices that have come back to haunt central banks in their role as guardians of financial stability."

"Amidst ultra-low interest rates and super abundant liquidity, leveraging and risk-taking were celebrated as if there is no tomorrow," Das said. He also mentioned "one of the most synchronised tightening of monetary policies" adopted by central banks in response to events like the Ukraine war that set consumer prices soaring. "This resulted in risks to financial stability, especially when these risks morphed into banking crises in certain countries in March 2023 and sell-offs in financial markets in August and September 2024. These developments have once again brought to (the) fore the role of central banks in securing and preserving financial stability," he elaborated. 

Central banks today are "confronted with a future where their mandates, their functions and their performances are all up for unforgiving scrutiny" like never before, the RBI chief said. They are treading in the "uncharted terrain of a twilight zone" in the aftermath of the pandemic and the persistent geopolitical strife thereafter, he said.

He also summarised three main emerging risks to financial stability facing central banks today: 

• Divergence in global monetary policies
• A rapid expansion of private credit markets with limited regulation
• Rising debt-servicing costs due to higher interest rates

The RBI Governor also touched upon a host of key areas in his keynote address at the event, discussing the evolution of monetary policies over the years, especially in the emerging markets, and the significant role played by a technology-driven digitalisation wave in payments. 

Overall, central banking has been a success story in the current decade despite "difficult trials and trade-offs".

"In the realm of monetary policy, central banks have been successful in bringing inflation closer to targets. Major financial collapses or recessions, seen during earlier episodes of crisis, have been averted. Central banks are now at the forefront of technological innovations and are driving them through sandboxes, innovation hubs and hackathons," the RBI chief said. 

Central banks must remain vigilant and adaptable, continuously assessing risks and building resilience, he said.

They should remain prepared to navigate complex challenges, support sustainable growth, maintain price stability and promote sound and vibrant financial systems, Das concluded.