Business Desk mumbai

RBI Governor Sanjay Malhotra on Thursday underscored the inherent fragility of financial institutions, warning that a loss of confidence can swiftly trigger bank runs and transform liquidity stress into solvency crisis.

Delivering the Second V. K. R. V. Rao Memorial Lecture at the Delhi School of Economics in New Delhi, he said banks, unlike manufacturing units, cannot be shut temporarily and must be resolved immediately to prevent contagion.

Malhotra highlighted that financial regulation operates within a fundamentally different framework from other sectors because financial institutions perform maturity and liquidity transformation—accepting short-term deposits while extending long-term loans. This structure, he said, makes banks vulnerable to panic-driven withdrawals that can spread rapidly across the financial system.

He pointed out that financial institutions are highly interconnected, and the failure of one can trigger cascading effects, including deposit losses, disruption of inter-bank markets, contraction of credit, and stress in payment systems. Citing the 2008 global financial crisis, he said the episode demonstrated how such failures can spiral into systemic crises.

The Governor also drew attention to the procyclical nature of financial markets, noting that risk tends to be underpriced during booms, leading to weaker lending standards and inflated asset prices, while credit dries up during downturns when it is needed most. This amplification of economic cycles, he said, makes financial regulation both complex and consequential.

Addressing the challenge of regulating financial innovation, Malhotra said emerging products such as stablecoins, cryptocurrencies, and buy-now-pay-later models increasingly blur traditional regulatory boundaries. Policymakers must continuously decide whether to ban, permit, or bring such innovations within existing frameworks, he said, given their evolving risks and benefits.

‘RBI doesn't target any level for rupee’

The Reserve Bank Governor said the central bank does not target any level for the rupee, and the recent depreciation of the domestic currency against the US dollar is primarily due to trade uncertainties following the imposition of tariffs by the Trump administration. The governor also exuded confidence that India will secure a favourable trade deal with the US, which will help ease the pressure on the current account. 

‘Mule Hunter tool, a good success’

The Reserve Bank Governor said the Mule Hunter tool launched to check digital fraud is showing a good success rate. MuleHunter.ai, an AI-enabled tool designed by the Reserve Bank Innovation Hub (RBIH) to flag mule accounts, is detecting about 20,000 mule accounts every month. Mule accounts are intermediary in the movement of fraudulent funds. It helps in channelling and siphoning off fraudulent money.                                 -PTI