Reserve Bank of India Governor Shaktikanta Das has asked Indian companies, including banks, to improve their operating system to increase efficiency to the full potential of the economy. Das said this amid growing macroeconomic worries along with declining economic growth. He said that while being cautious about the impact of global financial markets, consumption and investment are two major challenges. Along with this, the governor cautioned against the ‘cobra effect’ in the economy.
What is cobra effect?
The cobra effect occurs when an attempted solution to a problem makes the problem worse,as a type of unintended consequence. The term is used to illustrate the causes of incorrect stimulation in economy and politics.
The term cobra effect originated in an anecdote, set at the time of British rule of colonial India. The British government was concerned about the number of venomous cobra snakes in Delhi.The government therefore offered a bounty for every dead cobra. Initially this was a successful strategy as large numbers of snakes were killed for the reward. Eventually, however, enterprising people began to breed cobras for the income. When the government became aware of this, the reward program was scrapped, causing the cobra breeders to set the now-worthless snakes free. As a result, the wild cobra population further increased.
What did the RBI governor say?
The governor of the central bank sounded the alarm at a time when many promoters of companies are under regulatory scrutiny. Das said in the introduction of the 20th edition of the Financial Stability Report released on Friday, “The challenge is to ensure the transmission of monetary policy impulses to the advantage of real economies and not to aid build-up of froth in financial markets. We need to be mindful of the cobra effect.”
All the regulators under the Financial Stability and Development Council are making efforts to strengthen confidence in the financial system, Das wrote,.re-emphasizing the importance of operating arrangements that are better. “According to me, this is an important factor to increase efficiency according to the full potential of the economy,” he wrote.
The RBI cut the repo rate by 1.35% this year to accelerate sluggish economic growth. After this reduction, the policy rate has come down to 5.15%, which is the lowest level of 9 years. But despite this, the gross domestic product (GDP) growth rate remained at the lowest level of 4.5% in the second quarter of 2019-20 at 4.5%.
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