As Sanjay Malhotra takes over as the 26th Governor of the Reserve Bank of India (RBI), the central bank faces a slew of critical tasks aimed at navigating an evolving economic landscape. From sustaining economic growth to enhancing financial inclusion and modernizing regulatory frameworks, the challenges before the RBI are as vast as they are complex.
Growth and stability in focus
The Indian economy is at a crucial juncture. With GDP growth slipping to a seven-quarter low of 5.4% in Q2FY25 and the central bank trimming its growth forecast for FY25 to 6.6% from an earlier projection of 7.2%, fostering economic stability remains a top priority. Financial markets are anticipating a 25-basis-point repo rate cut in February 2025 to counter economic sluggishness. However, navigating these monetary decisions while balancing inflationary pressures will test the RBI’s resolve.
Advancing financial inclusion
Despite notable progress, much work remains in expanding financial inclusion across rural and semi-urban areas. Many individuals in these regions lack traditional identity documents and financial literacy, making them vulnerable to exploitation and systemic exclusion. The RBI’s plans to launch a reoriented nationwide awareness program and improve grievance redressal systems are expected to play a pivotal role in bridging these gaps.
Strengthening regulatory frameworks
The approval of the self-regulatory organization (SRO) framework for entities like the Fintech Association for Consumer Empowerment (FACE) signals a move toward fostering compliance and collaboration in the financial ecosystem. More entities, such as the Digital Lenders Association of India and the Finance Industry Development Council, are seeking SRO status, indicating the model’s growing relevance. However, implementing this framework effectively while ensuring that it does not dilute oversight will be a delicate balancing act.
Enhancing bank governance
The RBI has been actively engaging with bank boards to ensure transformative governance. Recent interactions emphasised governance stability, expertise in board composition, corporate culture, and risk management. Strengthening these elements will be crucial as the central bank pushes for a global standard of risk-focused supervision, aiming for better discovery and mitigation of potential systemic risks.
Green taxonomy and sustainable finance
Despite strides like the introduction of the Sovereign Green Bonds framework, the lack of a formal green taxonomy continues to hinder India’s transition to a sustainable economy. This gap has made it difficult to track and channel finance toward green sectors effectively. The RBI’s initiatives on climate risk and sustainable finance will need to gain momentum to meet the goals of the Paris Agreement and India’s commitment to a net-zero future.
Banking licences and consumer advocacy
The issue of granting banking licenses to corporate houses remains unresolved. While the RBI has accepted many recommendations from a 2020 internal working group, allowing large corporate houses to promote banks has yet to see a decision. Similarly, the need for a national consumer advocacy body to support financially vulnerable individuals has become pressing as retail credit surges post-pandemic. The central bank has hinted at new measures to strengthen consumer protection but has yet to outline concrete plans for such an institution.
Modernising the RBI’s approach
The RBI has made progress in streamlining its operations, including the withdrawal of over 400 outdated circulars under the Regulatory Review Authority (RRA 2.0). The focus now shifts to fostering a more consultative policy environment and engaging effectively with regulated entities to improve compliance and transparency.
