Page 29 - RMAI July-September 2018

July - September 2018

Risk Based Liquidity for India

Sonjai Kumar,
Independent Risk Management Consultant,
Ambassador in India of Institute of Risk Management, London

Introduction how much the central bank should keep the excess
The spat is going on between Reserve Bank of India reserve. The Government contention is RBI is sitting
(RBI) and Government of India (GoI) on easing the on excess reserve and some part should be released
liquidity so that the money can be passed to stimuli so that MSMEs can be funded to provide some stimuli
the economy. Both the parties are right given their leading to some employment generation. The key
role, let's look at some of the rationales in this write- question is how much is enough for the economy.
up to understand and appreciate the stands of both Some central banks around the world keep 13% to
the parties. One of the key contentious issues is how 14% of assets (US and UK) as the excess of reserve and
much liquidity should be kept, the answer is easy, it rest are released to the government. By this logic, the
should be risk-based and not by any global standards. RBI may release half of the excess of capital to the
government which could be in the tune close to 5
Risk Based Decisions Lakh Crore.

Any decision that is taken should consider what the In my assessment this logic has a severe shortcoming,
inherent risk in the decision is. The two key decisions the contingency reserves are kept for the future
that are weighing heavily on the government are uncertainties and the risks that may arise. The risks
“Demonetization” and second is “GST”. As a result of that the US or UK economy that faces are very
this, Micro, Small and Medium Enterprises (MSMEs) different compared to what the Indian economy
are currently in a stress situation looking for extra faces. The strength of the currency, the balance of
cash/credit to come out of it, while the RBI has payment, fiscal deficit, economic parameters such as
tightened its grip on a bad loan. As a result of ailing inflation, interest rate, unemployment, industrial
MSMEs the unemployment is increasing and next growth are very different in US/UK and in India. Just
year general election is there. The government the growth in GDP rate is not good enough to these
desperately want to use the extra liquidity that RBI risks keeping at bay. India definitely requires higher
has. liquidity compared to what other developed
Now the question here is, was the two key decision economies are keeping.
mentioned above were risk-based? In the risk-based The decision should not base on what other
decisions all the risks should be identified at the time economies are keeping, but rather what are your risks
of taking any critical decision and mitigation action and what mitigation plans the Country has. If the
should be prepared at the time of taking the decision. Country does not a mitigation plan for the future
If this is not done, the Country may end up in a crisis emerging risks, the current reserve could be a good
situation. number.

Liquidity Position Risk Assessment and Stress and Scenario Testing
(SST)
The RBI is sitting on 27% of 36.17 lakh Crore, 9.7 lakh
Crore of excess reserve. There is a no defined formula, How much is good enough? Identify all the future

28 RISK MANAGEMENT ASSOCIATION OF INDIA