Thinkpad: The Empire Strikes Back
We saw some pushback from the empire — the established international monetary system —against purportedly new forms of money.
The IMF warned against the financial stability risks posed by cryptocurrencies. The Bank of International Settlements warned that even Central Bank Digital Currencies, believed to be the more legitimate cousin of cryptocurrencies, pose systemic risks.
The IMF, releasing a part of its global financial stability report, estimates that the total market value of all the crypto assets surpassed $2 trillion as of September 2021—a 10-fold increase since early 2020. It suspects that emerging and developing markets are leading the surge in trading volumes.
The fear in the IMF’s note is barely disguised. The fund talks about consumer protection risks. It speaks of fears around money laundering and terrorist financing — worries expressed in many geographies including India.
It fears that “cryptoization” can reduce the ability of central banks to effectively implement monetary policy. It can also pose financial stability risks.
The crypto believers will see this as the establishment protecting its turf. The non-believers will say ‘we told you so.’ But this much is clear — given the rapid advance of crypto, policymakers can no longer stay undecided.
Or as Yoda said in Star Wars — “Do or do not. There is no try.”
For some time, it was thought that central bank digital currencies could, at least in part, counter the need fulfilled by cryptocurrencies. A number of central banks, including India, are researching CBDCs.
Well, the Bank of International Settlements burst that bubble too. While design and technology issues around CBDCs have been debated for while, BIS chose to bring the attention back to more real world concerns.
The BIS, citing central bank research papers, warned that central bank digital currencies could worsen bank runs. Government-backed digital currencies “could lead to higher volatility in deposits and/or a significant, long-term reduction in customer deposits.”
Try it but under tight controls seemed to be the BIS’ advice.
Amid rapidly changing times, to central banks we say — “May the force be with you.”
While central banks fight (or join) change, some of them have more bread and butter issues to worry about — inflation, growth, interest rates liquidity.
We return here to a pet theme (for the last time for awhile we promise) — the Reserve Bank of India’s dilemma around whether to begin normalisation or not.
The October monetary policy meet comes up this week and ahead of that there have been some interesting signals. Those who obsess about monetary policy would have noticed that the central bank this week set a higher cut-off at its variable rate reverse repo auctions. In simpler terms, what does this mean? It may (MAY) mean that the central bank is now signalling its discomfort with the ultra-low short term rate.
Citibank became the first major house to predict a 15 basis point hike in the reverse repo rate this week.
We know the central bank is facing tough choices. Just how tough? This piece from A Prasanna and Abhishek Upadhyay makes an attempt to assess a “shadow policy rate” for India, which measures the impact of all the non-standard monetary easing measures taken by the central bank.
The result of their analysis: “While the effective policy rate i.e. reverse repo rate has been cut by 155 basis points during the pandemic, the total accommodation estimated on the basis of fall in real effective policy rate is 2.5x that value, at 390 basis points.”
That explains why the decision to start reversing monetary policy accommodation is so critical but also so difficult.
In the end it may not even be the central bank’s decision to make. TCA Srinivasa Raghavan, while comparing us monetary policy watchers to those who bet on which crow would fly off the tree first, writes in the Business Standard that eventually it is the government and not the RBI who will decide when to normalise policy.
We warn you of some breathless monetary policy coverage this week.
Till then, have a good weekend.