By Ruma Dubey

We in India constantly rue about the high interest rates. The moment a GDP number, IIP or inflation numbers are announced, more than the analysis of the economic numbers, all attention is paid to how the RBI would react – with a rate cut or a hike. That’s all these economic numbers have become all about.

And for all those who have been raving and ranting about how RBI is sitting tight on rates and needs to lower the rates more, here is finally proof that our RBI Governor does know the best and we should have faith that he is doing what is best for the country in the long run.

There is a very telling Annual Report published by the Bank for International Settlements (BIS). This Switzerland based bank is like a watchdog for all the central banks. The BIS has 60 member central banks, representing countries from around the world that together make up about 95% of world GDP. As a bank, the BIS does not accept deposits from, or provide financial services to, private individuals or corporate entities.

So the BIS Annual Report actually goes on to berate this low interest regime in developed countries. The BIS has issued a stark warning that an unprecedented period of ultra-low interest rates mask deep weaknesses in the global economy and threaten to be the trigger for the next financial crisis.

The BIS has said that these abnormally low rates of interest rates, near zero for past six years after the global crisis is actually a reflection of a deeper malaise. Instead of relying on structural reforms to being about sustainable growth, the BIS said that these low rates and willingness to print more money has put the world into the current situation that it is in. Well, we need to give attention to what the BIS says because apart from being the central bank for the central banks, it had similarly warned about the oncoming 2007 global crisis. Thus this latest warning from the BIS will be taken seriously by most banks, especially the US Fed Reserve as a call to start turning back the monetary policy to a more normal setting.

The BIS has said in the Annual Report, “Rather than just reflecting the current weakness, low rates may in part have contributed to it by fuelling costly financial booms and busts. The result is too much debt, too little growth and excessively low interest rates. In short, low rates beget lower rates.” For a detailed read into the report, go to: http://www.bis.org/publ/arpdf/ar2015e.htm

And after reading all this, aren’t you thankful that RBI is cautious, maybe even over cautious? But given the flat world we live in, the global inter connectivity across all aspects, this need to remain over cautious is extremely necessary. We should be glad that the RBI did not look merely at the short term gains, which could have come via rate cuts; but that would have come at the cost of long term stability. Especially now, we in India are worried about the unfolding Greek saga but not losing sleep over it; it is the usual piquant kind of curiosity, similar to probably the curiosity over the happenings in your neighbor’s house. If India too had fired all guns, sacrificed prudence at the altar of growth, maybe we too would be looking at a much bigger crisis. The low interest rates would have created much bigger asset bubbles than what we are looking at right now. Can you imagine the NPAs of the banks if rates were lower?  The currect situation of the banks is due to indiscriminate lending, especially by PSUs under political pressure and lack of autonomy.

India too is a registered member of the BIS and while others received a rap on their knuckles, BIS praised India’s RBI for Basel III compliance. The BIS observed that several aspects of the Indian framework were more conservative than the Basel framework. This included higher minimum capital requirements and risk weightings for certain types of exposures, as well as higher minimum capital ratios.

Another big plus – recently Principles for Financial Market Infrastructure (PFMIs), which sets global standards for the financial sector entities across the world, finalised by the International Organisation of Securities Commissions (IOSCO) and the BIS, rated India the highest, with RBI and Sebi being rated better than their peers in China and the US. India scored “4” for all eight parameters on a scale of one to four – meaning it has implemented all regulatory forces as prescribed.

Yes, we never know the value of what we have till an outsider point it out to us; till then the grass is greener on the other side. And thank god the RBI does not bend to political pressure and has complete autonomy! Or else, there wouldn't have been much difference between the banking sectors plight and the country's state - all would have been one big NPA.