A prominent finance professor at the Indian School of Business (ISB) has issued a stark warning regarding the Reserve Bank of India's (RBI) expanding balance sheet, asserting it risks undermining India's macroeconomic stability. Prasanna Tantri, an associate professor of finance, criticized the RBI's recent interest rate hike as being 9-12 months delayed and called for immediate, decisive policy corrections.
Excessive Monetary Expansion Blamed for Inflation
While the RBI has primarily attributed inflation to external factors like crude oil prices, Tantri contends that the core problem is internal: excessive monetary expansion. He estimates the RBI's balance sheet has surged from approximately ₹70 lakh crore to nearly ₹100 lakh crore over the past year. This expansion, he claims, has injected ₹20-30 lakh crore of additional broad money into the economy.
Broad money, according to Tantri, now stands at roughly ₹330 lakh crore, exceeding 90% of the last financial year's GDP. He highlights that such extraordinary measures, akin to quantitative easing, are typically reserved for combating recession or deflation, questioning their justification in an economy growing at around 7%.
Warning on Household Debt and Financial Fragility
Tantri also pointed to the FCNR (Foreign Currency Non-Resident) deposits, estimating that subsequent credit expansion from this could add another ₹30-40 lakh crore to broad money. He cautioned against assuming that prolonged monetary easing would be painless to reverse, drawing parallels to the experiences of Europe and Japan.
"If inflation becomes entrenched, interest rates may eventually have to rise much further," Tantri wrote. His primary concern is that a significant portion of this additional money will fuel consumption loans, leading to increased household indebtedness, financial fragility, and heightened inflationary pressure.
He emphasized that the macroeconomic stability painstakingly built over the past decade is now at risk.
Urgent Call for Swift Policy Correction
Despite the grim assessment, Tantri believes it is not too late for corrective action. He urged the RBI to prioritize bringing its balance sheet back to 25% of GDP or less and to curb monetary expansion. While acknowledging that this might necessitate a short-term sacrifice in economic growth, he argued that preserving stability is a worthwhile cost.
The RBI recently raised its benchmark repo rate by 25 basis points to 5.50%, the first hike in nearly four years. Governor Sanjay Malhotra indicated that rate cuts are off the table for the near term, with future policy actions dependent on evolving conditions and underlying price pressures. Tantri expressed hope in the RBI's willingness to allow the rupee to adjust, reiterating the need for swift and decisive action to rectify past policy mistakes.