How does RBI maintain Financial Stability?
The objective of the RBI is also to maintain financial stability in the country. Financial stability can be defined in terms of a nation’s ability to facilitate and enhance economic progress by managing risks and absorbing shocks. The financial markets and the various financial institutions are resistant to economic shocks. This stability is important because it represents a sound financial system.
Rapid liberalisation of the financial sector, an inadequate economic policy, inefficient methods for resource allocation and poor market discipline can be factors for financial instability. A stable financial system is competent enough to efficiently allocate resources, assess and manage financial risks, and maintain the levels of employment. A stable economic system absorbs the shock beforehand with the help of self-corrective mechanisms. It refers to a condition in which the financial institutions are adept to carry out their financial transactions without requiring any external assistance, such as that of the government.
Stability of financial markets enables economic agents to raise and operate funds freely. Stability of financial infrastructure is used to define a condition where the financial system works to ensure that both the financial safety net and the payment and settlement system are running effectively. It is an essential condition as it ensures a healthy development of the entire economy.
A credit-rating company called ICRA Limited (formerly known as Investment Information and Credit Rating Agency of India Limited) was established in 1991 to provide independent, well-researched and expert credit risk opinions to borrowers in relation to their borrowing activities. It is essentially the second largest credit rating agency in India after CRISIL (formerly Credit Rating Information Services of India Limited). It provides ratings, research, risk and policy advisory services. A credit rating agency does researche and analyze the financial strength of several companies and government entities. They help investors in identifying the company’s ability to pay debts and to assess the level of risk involved.
