The Banking Industry’s Role in Re-Stabilising the Indian Economy

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24 Sep 2021
7 min read

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The banking industry is the backbone of every other industry in an economy. Given that the banking industry churns out and keeps track of all the financial capital in an economy, this industry automatically gets interlinked to all other industries and is responsible for keeping money laundering and fraudulent people in check. Naturally, this therefore makes the banking industry ever growing as the need for it does not die as long as the economy exists. #ThinkWithNiche

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The banking industry is the backbone of every other industry in an economy. Given that the banking industry churns out and keeps track of all the financial capital in an economy, this industry automatically gets interlinked to all other industries and is responsible for keeping money laundering and fraudulent people in check. Naturally, this, therefore, makes the banking industry ever-growing as the need for it does not die as long as the economy exists. 

Regulating cash flow is a significant part of what the banking industry does and can be a staunch determinant of macroeconomic stability. While the regulation of cash flow is the primary responsibility of the central bank, commercial banks play a crucial role in its implementation. The RBI, in the case of India, decides the number of notes to be printed based on economic growth and the increase in demand for money. The printed money is then distributed across commercial banks and further put out into ATMs. 

The above-mentioned mechanism highlights the grave importance of the banking industry in a general sense. However, with the pandemic, as our GDP and overall demand have fallen, the RBI does not have any direct incentive to print more money. In such a case, the government borrows from the central bank and lets them hold onto government assets in return for a higher cash flow. 

Many might question why the government can not just directly monetize the government deficit. The answer is simple, the central bank and baking industry are not under the government. They are a separate entity that works with the government. Furthermore, direct monetization of the deficit will only worsen the economic crisis we are in. This happens as follows- in the event that the government directly monetizes their deficit and the RBI prints more money, the increased cash flow will now lead to a surge in aggregate demand. Such slight nudges can lead to healthy inflation which can boost economic activity. However, giving the government the right to fully monetize the deficit risks that the government might not stop in time and could lead to hyperinflation. Due to the already existing deficit, hyperinflation would only worsen the economic crisis we are in. And the banking industry plays an integral part in its avoidance. 

On a smaller scale, the baking industry provides individuals with economic autonomy. It enables people to make financial choices that would be in their best interest. Taking loans, making deposits, opening a savings account are some of the simplest examples of it. With the economic crisis that this pandemic has brought with it, commercial banks have placed checks and balances in place to regulate interest rates and steer people away from loans in a time like this. This puts into perspective how despite granting citizens with economic autonomy, the banking industry is also working towards steering away from financial mistakes. 

The re-stabilization of the Indian economy post-Covid is sure to take some time due to the large-scale detriments that have taken place. However, the banking industry being a strong pillar of the economy is most certainly a ray of hope in expecting a slightly speedy recovery from the economic hits India has taken. 

TWN Special