Sansad TV Perspective: RBI Monetary Policy

In the series Sansad TV Perspective, we bring you an analysis of the discussion featured on the insightful programme ‘Perspective’ on Sansad TV, on various important topics affecting India and also the world. This analysis will help you immensely for the IAS exam, especially the mains exam, where a well-rounded understanding of topics is a prerequisite for writing answers that fetch good marks.

In this article, we feature the discussion on the topic: RBI Monetary Policy.

Anchor: Vishal Dahiya

Participants:

1.  Anand Singh Bhal, Former Principal Economic Advisor, Govt. of India
2.  Deepshikha Sikarwar, Senior Editor, The Economic Times
3.  Dr. Aruna Sharma, Member, Digitisation Committee, RBl

Context:

The Reserve Bank of India has raised the repo rate.

Details of Monetary Policy Committee meeting: 

• The Monetary Policy Committee(MPC) took a unanimous decision to raise the benchmark lending rate by 50 basis points to 5.40%. 
• This was the third hike of the policy repo rate by the RBI this year after a 40 basis points hike in May followed by another hike of 50 basis points in June. 
• RBI Governor highlighted that as Consumer Price Inflation(CPI) remains uncomfortably high and is expected to remain above 6%, MPC decided to focus on withdrawal of accommodative policy stance to check inflation.
• It was also pointed out that domestic economic activity is showing signs of broadening and Bank credit growth has accelerated by 14% as against 5.5% a year ago. 
• RBI has also retained its economic growth projection at 7.2 percent for the current fiscal.

Key Takeaways from the meeting:

• The fiscal stimulus which was provided by the RBI during the pandemic has been withdrawn.
• The repo rate is more than the pre-pandemic level.
• The withdrawal of the accommodative stance by RBI has shown a tightening of the monetary policy.

Positive signs in the Indian economy:

• The exports in commodities are doing well.
• The Current account deficit of two-three percent is sustainable.
• Other indicators like that of GST consumption are robust.

Reasons for the hike in repo rate:

• An increase in repo rate takes into account the actions of other central banks across the globe.
• This was required looking at the global macroeconomics of increasing interest rates.
• A high inflation rate exists in the economy.

Impact of risen interest rates:

• The interest rates of deposits will increase.
• The middle-class section of the population will resort to further savings further hitting the demand.
• Global rise in interest rates with falling oil prices will impact Foreign direct investment and Foreign Institutional Investment. This will result in huge withdrawals further hampering the foreign exchange rates.

Reasons for high inflation rate:

• High inflation is a phenomenon globally as evident in western countries like US, Britain and other European countries where inflation has touched 7 percent( which is 2 percent otherwise).
• Inflation is unfolding across the world due to:
  • Black swan event
  • Energy crisis
  • Food prices 
  • Russia- Ukraine war
• Some of the domestic policies like that of sudden hike in export rates were not conducive. 

Measures taken by Central Government to control inflation:

• The government is working towards controlling inflation by targeted interventions like-
  • Addressing vegetable oil prices challenge.
  • Reduced taxes on crude oil.
• The Atmanirbhar Bharat scheme is also a step undertaken by the government in this direction.
• The global value chains in the pharmaceutical and electronic sectors are also made resilient

Way Ahead:

• Both the central bank and the government should work in tandem to address the challenge of inflation and sustained economic growth.
• Inflation is usually seen from the demand side, it should be observed from the supply side as well.
• MSME sector should also be supported as it is a key player in economic growth.
• The goods and services exports should be increased through targeted policy measures.

Conclusion:

If it is ensured that our recovery is sustainable in the long run and a targeted policy approach is followed then tiding over the global economic crisis will be easy. It should also be considered that the economy does not work in isolation in present times so any impact on the global economy tends to have a domino effect on the domestic economy as well.

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