Central bankers have never had it easy. But the last three years have been particularly taxing. Coming in and moving out of economic stimuli, managing inflation and reviving growth. Each one of them has had its plate full. The latest reports on currency wars between economies have once again put them in the spotlight. It would thus be appropriate to evaluate how these entities have managed their operations in the past.
The central banks carry out the task of ensuring that their currencies do not hurt trades. At times even at the cost of economic stability. The central bank of China being a case in point. The central banks of developed economies in particular deserve kudos for doing all that it takes to pull the economies out of recession. The results are for all to see.
As seen in the adjacent chart, the balance sheets of the central banks in developed economies have seen a very rapid expansion in recent past. Until October 2008 most of the additional liquidity was balanced through asset sales. However, thereafter the liquidity seems to have been pumped in thoughtlessly. In case of the Fed and the ECB, the desire to aid economic revival has induced the central banks to nearly double balance sheet sizes. ECB, however, was a little quick to mend its ways after the sovereign default risks. But the Fed is yet to realize its mistake.
Back here in India, we have had more than a sensible central bank. The economic slowdown in India was relatively less malignant. Being less export dependant, impact of global economic woes was felt only in selective cases. Banks' financials were far more stable and did not require government bailouts. Strict regulation of currency movements helped prevent unforeseen leverage risks. And to top it all, negligible presence of risky securities along with prohibitive provisioning kept the risks at bay.
The result is that the RBI's balance sheet expanded not more than 40% from the base of August 2007 any time in last 36 months. On the contrary the central bank sucked up significant liquidity in recent months. In its effort to protect growth, the central bank has not taken unmindful decisions. And even this time, when exporters are looking for the central bank to bail them out of the currency trouble, the RBI is unwilling to relent in a hurry.
The balance sheets of central banks have not been considered as key indicators of economic prospects in the past. Probably it is time that they are taken more seriously.