Sansad TV: Perspective – RBI Monetary Policy

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Introduction:

The Reserve Bank of India raised the repo rate again. The Monetary Policy Committee unanimously decided to raise the key rate by 50 basis points to 5.40%. This is the third hike in the RBI’s key rate this year following a 40 basis point hike in May followed by another 50 basis point hike in June. Stressing that consumer price inflation or CPI remains uncomfortably high and is expected to stay above 6% RBI, Governor Shaktikanta Das said the MPC had decided to focus on withdrawing accommodative policy to control inflation. He also said domestic economic activity showed signs of widening and bank credit growth accelerated to 14pc from 5.5pc a year ago. RBI also kept its economic growth projection at 7.2% for the current financial year.

Monetary Policy Committee:

  • It is a statutory and institutionalized framework under the Reserve Bank of India Act 1934to maintain price stability, while keeping the growth objective in mind.
  • The 6-member Monetary Policy Committee (MPC) constituted by the Central Government in accordance with Section 45ZB of the Amended RBI Act 1934. The first meeting of the Monetary Policy Committee (MPC) was held in Mumbai on 3 October 2016.
  • The Governor of the RBI is ex officio Chairman of the Committee. The MPC determines the key interest rate (repo rate) required to achieve the inflation target (4%).

Monetary policy objectives:

  • This is the macroeconomic policy defined by the central bank. It involves the management of the money supply and interest rates and is the demand-side economic policy used by the government of a country to achieve macroeconomic goals such as inflation, consumption, growth and production. liquidity.
  • In India, reserve bank of india monetary policy aims to manage the quantity of money in order to meet the needs of different sectors of the economy and to accelerate the pace of economic growth.
  • The RBI implements monetary policy through open market operations, discount rate policy, reserve system, credit control policy, moral suasion and many other instruments.

Challenges before the RBI:

  • When it comes to monetary policy, the most important mandate of the RBI is to maintain price stability.
  • To this end, the RBI is required by law to maintain retail price inflation based on Consumer Price Index (CPI)) at the 4% threshold (with a variation margin of 2 percentage points).
  • But, another major concern for the RBI is the overall economic growth of the economy.
  • Thus, the challenge before the RBI was to balance concerns about boosting growth while ensuring that inflation did not spiral out of control.

Monetary policy instruments and how are they managed?

  • Monetary policy instruments are of two types, namely qualitative instruments and quantitative instruments.
  • The list of quantitative instruments includes open market operations, discount rate, repo rate, reverse repo rate, cash reserve ratio, statutory liquidity ratio, standing facility and the Liquidity Adjustment Facility (LAF).
  • Qualitative instruments refer to direct action, change in monetary margin and moral suasion.

Quantitative easing for India:

  • According to some economists, the only medicine that can work is quantitative easing, an appeal authority does not even argue.
  • QE, quantitative easing, may not cure the sick, but it may manage to pull India’s economy out of a coma.
  • This type of EQ has a few advantages. First, it reduces the yield on long-term government bonds.
  • This lowers lending costs for risky borrowers, since government bond yields serve as a benchmark.
  • Second, a more liquid banking system with more low yield cash than high yield bonds will be eager to lend, at least in theory.
  • However, this type of QE is based on the granting of loans. If the demand side of the economy is struggling, the impact may be limited because of the one thing it is not doing: increasing the money supply across the economy.

Rise in inflation over a period of time:

Inflation encourages current consumption (buying goods and services now before prices rise) and discourages saving.

  • People who have savings suffer in times of inflation because the purchasing power of their savings decreases as prices rise.
  • The real interest rate (nominal rate minus the inflation rate) is reduced in times of inflation.
  • Real interest rates can be negative if the inflation rate is higher than the interest rate. If this is the case, the purchasing power of savings decreases. This discourages saving.
  • People who have borrowed money benefit because the real value of loans decreases as price levels increase (loans are easier to repay in the future because prices and incomes increase over time).

Conclusion:

  • The latest consumer price index data shows retail inflation accelerating nearly 100 basis points to a three-month high of 5.03% in February, food prices and remaining volatile fuel.
  • Domestic economic activity is beginning to recover with the ebb of the second wave.
  • Going forward, agricultural production and rural demand are expected to remain resilient.
  • Although investment demand is still anemic, improving capacity utilization and favorable monetary and financial conditions are setting the stage for a long-awaited recovery.

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