‘Cobra effect’ concerns RBI guv while urging cos to reform

Das urged companies including banks to improve their system while staying alert of a cobra effect where a solution is worse than the problem

Reserve Bank of India Governor Shaktikanta Das has asked Indian companies, including banks, to improve their operating system to increase efficiency to the full potential of the economy. Das said this amid growing macroeconomic worries along with declining economic growth. He said that while being cautious about the impact of global financial markets, consumption and investment are two major challenges. Along with this, the governor cautioned against the ‘cobra effect’ in the economy.

The governor of the central bank sounded the alarm at a time when many promoters of companies are under regulatory scrutiny. Das said in the introduction of the 20th edition of the Financial Stability Report released on Friday, “The challenge is to ensure the transmission of monetary policy impulses to the advantage of real economies and not to aid build-up of froth in financial markets. We need to be mindful of the cobra effect.”

All the regulators under the Financial Stability and Development Council are making efforts to strengthen confidence in the financial system, Das wrote,.re-emphasizing the importance of operating arrangements that are better. “According to me, this is an important factor to increase efficiency according to the full potential of the economy,” he wrote.

The RBI cut the repo rate by 1.35% this year to accelerate sluggish economic growth. After this reduction, the policy rate has come down to 5.15%, which is the lowest level of 9 years. But despite this, the gross domestic product (GDP) growth rate remained at the lowest level of 4.5% in the second quarter of 2019-20 at 4.5%.

Cobra effect is a situation that arises when the attempted solution causes the problem to become more macabre. The governor of the central bank of the country said, “Due to extraordinary monetary policy stimulus, global interest rates have come down so much that this level has not yet been seen in developed countries… This has been possible due to the persistence of inflation at low levels for a long time. Due to this, the central bank is at a satisfactory level regarding the policy stance.”

“However,” Das continued, “the constraints on multilateral trade and the continuing geopolitical uncertainties could have an impact on the global financial markets.”

The challenge is to ensure that monetary policy benefits the real economy and does not, Das said, become insignificant in financial markets. “We need to be cautious about the cobra effect,” he wrote.

On the decline in economic growth and softening of credit demand, the RBI governor said that domestic and global factors had reduced GDP growth. Consumer debt is on the rise while wholesale debt growth is weak. The reason for this is that companies and financial intermediaries are focusing on reducing debt to improve their business activities, he reasoned.

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