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.
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’s GDP growth would expand by 7.5% in 2020. Also in April 2019, the IMF showed an expected GDP growth rate of 7.3% for 2019 and 7.5% for 2020. Both projections have India with the highest expected GDP growth in the world over the next two years.
The above growth rates make the role of the Reserve Bank of India increasingly important as the country’s total GDP moves higher. India is a top 10 nation for GDP overall but its numbers fall far behind the world’s 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’s 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’s actions will become increasingly important.
In April 2019 the RBI made the monetary policy decision to lower its borrowing rate to 6%. The rate cut was the second for 2019 and is expected to help impact the borrowing rate across the credit market more substantially. Prior to April, credit rates in the country have remained relatively high, despite the central bank’s 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’s 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.
One of the biggest advantages, however, was the increase in tax collection, which resulted from greater consumer reporting transparency.
In December 2018, the country elected Shaktikanta Das as its new RBI leader. Das is a supporter of demonetization inline with the top government officials’ views. Das is also expected to better align with India’s 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 and its central bank have 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.
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’s most-watched central banks.