RBIs financial stability review spots two risk from trump 2.0
The Reserve Bank of India (RBI) publishes its Financial Stability Review (FSR) semi-annually in a financial year. It generally evaluates the nature and magnitudes of risks affecting the Indian financial sector. It analyzes the strength of financial institutions to mitigate these risks with the help of stress tests. These risks consist of both international and domestic risks, with special focus on domestic risks. In the month of December 2024, the FSR realised signals of two prominent risks coming from the US elected-President Donald Trump’s administration.
The Financial Stability Unit (FSU) of RBI and its FSR publication came into existence to initiate crisis management and also to prevent crises such as the global financial crisis 2008. The FSU came into existence in August 2009 by global financial crisis 2008 and implementation of semi-annual publication of FSR in October 2009. Today, the FSR is released in the months of June and December every year. The FSR focuses on both macroeconomic and market related risks.
Current FSR report
The FSR of the month of December 2024 identifies two distinct risks associated with the upcoming new administration in the USA which will assume office in a fortnight. The first risk is the uncertainty brewing in the economy due to the support given to cryptocurrency by Trump’s regime. While, the second risk is the risk to the global economy from Trump’s proposed economic policies. It could occurring due to increasing geopolitical tensions, uncertainty associated with trade and industrial policies and potential tightening of financial conditions around the world leading to lower global economic output compared to its baseline projects.
The victory of Donald Trump in the US presidential elections gave a liberating path for the people and institutions who support the idea of decentralised finance or DeFi and particularly cryptocurrency. The Trump has a favorable opinion about Bitcoins and preference for crypto friendly regulations. Following the victory of Trump, Bitcoins registered pricing hiting more than $100,000 in the secondary market. This rally was influenced by the expectation of implementation of crypto-friendly policies under his regime.
Three reasons influencing the Bitcoins
There are three reasons which strongly influenced the rally of Bitcoins. Donald Trump in his election has constantly promised that he would make a strategic bitcoin hoard. This hoard would act as a reserve asset, where the US government would accumulate and hold a significant amount of Bitcoin. This reserve asset would be similar to any country’s foreign exchange or gold reserves. The main purpose for creating this reserve asset is to bring stablization in the financial system by mitigating inflation and also to strengthen its position in the global cryptocurrency market. The second reason is Trump and his family are closely connected with the cryptocurrency and DeFi movements via investments. The last reason is Trump nominated Paul Atkins, cryptocurrency supporter for the position to head the Securities and Exchanges Commission. It hints at easing up of earlier regulatory restrictions on crypto products.
Views of RBI
The Reserve Bank of India is worried about the risks associated with crypto products on the overall financial system. Its attempt to ban crypto products in India was rejected by the Supreme Court of India. As the Supreme court said that RBI does not have the right to impose restrictions on cryptocurrency trading. After this judgement, RBI strengthened the regulations and prohibited regulated entities from financing or supporting crypto products.
Many senior officers have given their public opinions on risks associated with cryptocurrency. The Deputy governor of RBI, T. Rabi Sankar stated that cryptocurrencies are created with the specific purpose to avoid a regulated financial system in his public speech in the year 2022. Further he stated that the cryptocurrencies have the potential to destroy the currency system, the monetary system, the banking system and overall government’s capacity to control the economy. The crypto products act as a threat to the financial sovereignty of a nation. There is also a possibility of strategic manipulaton by private firms or the governments who created and control them. These are reasons which led to the formation of the most advisable and possible choice of banning cryptocurrency in India.
During the discussion at Peterson Institute, Washington DC in October 2024, the former governor of RBI, Shaktikanta Das asserted the risk associated with cryptocurrency to the financial and monetary system. He requested coordination between central banks across the world regarding regulation on the crypto products.
Despite all this, the strong position of the Trump administration towards crypto products is increasing anxiety within RBI and its view towards risks associated with it. The current FSR report particularly states that widespread use of crypto-assets and stablecoins will certainly affect macroeconomic and financial stability. It could adversely impact the effectiveness of monetary policy, fical risk and avoid capital flow managment measures. It will also draw away the resources available for the purpose of financing the real economy and in turn threaten global financial stability. Despite the crypto products market being small in size, it keeps on growing. Its association with the traditional financial system is increasing to a potential systemic risk. Stablecoins also pose a potential risk.
The RBI is worried about the linkages between the monetary system and DeFi due to the potential it carries. As instability in DeFi can lead to temporary issues like liquidity problems, maturity mismatches, price volatility in assets and also have a spillover impact on the real economy, while regulators having no control on it.
Trump is promoting tokenisation as well. He and his three sons are providing support to World Liberty Financial, who develops tokens against crypto products. Though the company declines association with Trump’s extended family, there are proofs such as purchases of tokens or play roles of advisory.
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