It was
recognised that when private commercial banks fail, whether due to
malfeasance or misjudgment, they not only harm their trusting depositors,
they can also take down with them the rest of the financial System.
This gave
rise to the RBI, the regulating authority for banks.
With the
rise of neoliberalism, the central tenet of which is that markets should
be given free play, the regulatory role of central banks took a back seat.
They came to
be primarily mandated with inflation control
In later
years inflation targeting was made the sole objective of monetary policy.
The RBI was
permitted to exceed or fall short of a targeted inflation rate of 4% by a
margin of 2 percentage points.
This was
hailed by the government as the adoption of the ‘modern monetary policy
framework’ by India, and came into effect from the year 2016-17
Consequences of shifting roles of
RBI
In 2018,
within three years of the adoption of inflation targeting goal, a crisis
engulfed IL&FS, a nonbanking financial company in the infrastructure
space
It defaulted
on several of its obligations, including repayment of bank loans and the
redemption of commercial paper.
Bank
run on the Punjab and Maharashtra Cooperative Bank had to be averted
by imposing withdrawal limits
