Here is a hypothetical situation (Although I don't know why it cannot become a reality)- What if RBI turns into a regular Bank? I am just thinking of some of the implications of such an event.
Today the banks are reluctant to lend. In India, the inflation is zero percent and the lending rate is still around 9%. The RBI has been cutting the bank rate consistently, but to no benefit. Banks are not ready to bring down their lending rate. Now the question is that is there any quicker way of giving money to people?
What if RBI also starts playing the role of any normal corporate bank. Let it lend money to people/businesses/government at a lower rate than that is present in the economy.
Here is what will happen-
1. RBI will be able to not only increase money supply but actually increase
demand by lending at a lower rate
2. The private banks will face immense competition from the central bank. The result
will be that the pvt banks will also have to start lending at a lower rate
nice article.
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