In its review on April 15, the Reserve Bank of India (RBI) announced that it will not activate the Countercyclical Capital Buffer (CCyB) at this time, stating that current economic conditions do not warrant its use.
What is CCyB?
- The Countercyclical Capital Buffer is a regulatory tool introduced globally after the 2008 financial crisis, as part of the Basel III norms.
- RBI implemented the CCyB framework in 2015, but it has never been activated so far.
Purpose of CCyB:
- Build Capital in Good Times: Banks accumulate additional capital during periods of credit growth, creating a buffer for downturns.
- Curb Risky Lending: Helps prevent excessive, unsustainable lending during boom periods, reducing system-wide financial risks.
How it Works:
- The credit-to-GDP gap is the main indicator used to assess when to activate the buffer, supplemented by other economic indicators.
- Activation would require banks to hold more capital, which could slow credit growth and potentially impact GDP, according to experts.
Why RBI Held Off:
- Current credit growth and economic conditions do not suggest overheating or excessive risk buildup.
- Activating the buffer could unnecessarily dampen lending and hinder economic momentum.
(Sources: BL & ET)
