Banking

A study of the financial processes underlying India’s high-growth trajectory of the 2000s and its relationship with “riskless capitalism,” a term first used by Raghuram Rajan in November 2014, finds that the Indian growth story cannot be over-simplistically explained as a result of “market-oriented” reforms. Public sector bank credit-financed investments, particularly in the infrastructure sector, played a significant role in sustaining growth, most crucially after the global economic crisis. Such a growth trajectory, however, proved to be unsustainable with the expansionary phase coming to an end in 2011–12 and bad loans piling up in the banking system.

The Narendra Modi government appears to have decided to privatise public sector banks (PSBs). Preparations are underway with arguments being marshalled that “there is no alternative” to privatisation.

Analytical issues have arisen in the conduct of flexible inflation targeting as the framework of monetary policy, adopted formally by India in 2016, despite the noticeable downward drift in the inflation rate and concerns of many economists about its relevance in the light of the global financial crisis. Issues such as the framework’s rationale, the medium-term inflation target, the meaning of real interest rate in the Indian context, the realism in respect of inflation expectations and of the inferred logic of the yield curve, and the implications for economic inequalities have been pointed out.

The convergence of finance and technology to provide financial services by non-financial institutions, popularly known as “fintech,” has come to dominate the financial landscape. Taking stock of this development, its impact and implications for new products, processes and services, including for financial inclusion are examined. The Jan Dhan–Aadhaar–mobile phones trinity provides fertile ground for fintech to permeate to the “last mile.” Notwithstanding its manifold benefits, there is a need to exercise caution in areas such as privacy and ownership of data. In a fast-paced world of rapidly evolving technology and related financial services, regulators have new paradigms to grapple with and therefore, need to be proactive so as to not stifle the growth of this nascent sector.

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