Economy cannot grow through demand creation alone, falling household savings are a concern

“The economy can only grow by creating demand,” former Reserve Bank of India (RBI) Governor YV Reddy said in an exclusive chat with CNBC-TV18. Reddie. The 21 Governor of RBI who served as 2003 for five years has underlined that the decline in household savings is worrying and that its importance should not be underestimated. “Negative rates for 10 years, to stimulate demand, is not a good thing,” he said.

Reddy also expressed concerns about deteriorating relations between the center and the state. “There can be no progress without involving states,” he said.

Last month, Finance Minister Nirmala Sitharaman reported that GST compensation to some states was delayed because they had not made available the authenticated Accountant General’s certificate. She added that Kerala had not sent a single certificate since FY18.
She had said that Rs 86,912 crore had been released for GST compensation payable for all states until 31 May 2022. She had also clarified that it was the GST Board, not the Centre, which decided for whom compensation should be released. Sitharaman also reiterated earlier the AG certification requirement for clearance of TPS claims.

Reading the banking sector

Speaking about the recent rate hike by the US Fed, Reddy said that given the recent US situation and the panic of depositors, raising interest rates was the best course for the Fed. Last week, the Federal Reserve raised interest rates by 0.25%, citing inflation concerns and saying the crisis-hit banking sector was strong, sound, resilient and well capitalized. This decision led to the fixing of the interest rate at 5%, the highest level observed since June 2006.

He said a good bank is one where 30% of the banking system is owned by public sector banks. “Public sector banks remove the information asymmetry between the regulator and the banks,” he said.

The central bankers’ trilemma

“Central bankers as a group face some of the greatest challenges,” said former Reserve Bank of India (RBI) Governor Dr YV Reddy.

He said central bankers initially, in the face of COVID-19, were forced to cut rates, build liquidity and buy government bonds to finance large budget deficits. Then, as inflation rose in all countries, they were under pressure to raise rates. “Now the very rise in rupee rates creates problems of financial instability. And for emerging markets, there is the added problem of currency weakness and capital outflows. How should central bankers think when faced not with dilemmas but with trilemmas? Reddy said.

“The dollar too deeply embedded in the economic system”

The former RBI governor also said that India and China cannot replace the United States. China is not a global currency, he said, adding that “the (US) dollar is too closely tied to global trade and the economic system,” he said.

He also said that India is in a good position as the rest of the world is in serious trouble, at least in the short term. “India has successfully managed its short-term goals,” he said.

Reddy praised the current RBI Governor, Shaktikanta Das, saying he had collaborated with the government. “When there is a crisis, you cannot function without the government,” he said, adding that structural changes or crises cannot happen without the government.


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