When the RBI issues a warning, pay attention: Governor Das’s thoughts on cryptocurrencies

More debate and discussion regarding cryptocurrencies is needed, and when a country’s central bank warns about something, in this case cryptocurrency, it should be taken seriously, according to Reserve Bank of India (RBI) governor Shaktikanta Das.

The RBI governor was unusually candid, clearly relieved that he could physically address audiences for the first time since the outbreak. He had finished his keynote lecture to the annual SBI Banking & Economics Conclave, which was attended by senior bankers and the who’s who of the Indian corporate world. Dinesh Khara, chairman of the country’s largest lender State Bank of India and event host, moderated a question-and-answer session with the governor.

In his statement, the RBI governor frightened a few bankers, particularly private ones, by stating that the RBI is closely monitoring banks that are only motivated by profit.

The governor was asked about his thoughts on the standing committee on cryptocurrencies, as well as whether it would be appropriate to treat such private currencies as an asset class if a Bill is passed in the winter session of Parliament.

The governor was not privy to the standing committee’s talks, but he was unusually robust for a mild-mannered career bureaucrat on his way to becoming one of the RBI’s longest-serving governors on record.

“When the central bank, which has been charged with maintaining the country’s macroeconomic and financial stability, declares after lengthy internal deliberations that we have severe concerns (about cryptocurrencies)… then there are deeper difficulties, far deeper issues involved,” Das added.

“I have yet to see any such serious, well-informed conversations,” he said, bemoaning that most discussions on the issues revolve around the notion that it is a new technology that the central bank must embrace or regulate.

The governor reiterated his warning on the topic, saying that blockchain technology is a decade old and is here to stay and flourish, but cryptocurrencies, which are built on blockchain, are a different story entirely.

The RBI governor also reiterated his previous claim that the number of users signed in to bitcoin sites is “much inflated.”

Accounts are being opened for investments ranging from Rs 1,000 to Rs 2,000, and even Rs 500. Furthermore, the central bank has received reports that credit is being supplied to open accounts and increase the number of accounts. These small value investors make about 70-80% of the investor community on these platforms. However, he recognised that the value of cryptocurrency assets in the country has soared.

SBI chairman Khara stated that the abundant liquidity has caused several lenders to misprice their loans, albeit knowingly, in order to expand their books. Khara asked the governor in a layered question if there would be the same kind of liquidity support for banks and corporate entities when needed because the market sees the variable reverse repo rate (VRRR), the lower end of the policy rate corridor, inching towards the repo rate, the upper end of the corridor, as a clear indication of rate and liquidity normalisation.

The RBI governor responded that whether or not the loans were mispriced was a commercial choice for the banks.

“As we reminded bank CEOs a fortnight ago, the sheer presence of substantially excess liquidity should not lead to loan mispricing because this extended liquidity is not going to be a permanent characteristic,” Das added.

The beginning of the liquidity infusion last year was the requirement at the time to stop a collapse in the mutual fund industry, according to the RBI governor, who also assured of substantial liquidity support whenever needed. The RBI is now rebalancing liquidity.

“Let me be absolutely clear. There will always be enough liquidity to fulfil the needs of the productive sectors of the economy, but we want to rebalance the economy gradually so that banks only have the amount of liquidity they need, not too much,” the RBI governor added.

In his interaction with the SBI chairman, the RBI governor clarified that, while the central bank would not want to interfere in the commercial decisions of banks, the RBI’s current policy of near “real time supervision” would invariably mean that the central bank would be looking at the business models of the banks that make commercial decisions.

The government’s bank privatisation plan is on track, but the RBI’s role is primarily confined to selecting the right promoters based on the central bank’s fit and proper criteria. In order to assist privatisation, the central bank will also play a role in modifying the Bank Nationalisation Act.