No cut in time (Indian Express)

Mains Paper 3: Economy
Prelims level: Monetary Policy Committee
Mains level: Status quo by MPC

Context:

• The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) voted unanimously in favour of leaving the policy rate unchanged.
• Considering that the economic slowdown has been more severe than expected, and that till the last policy, the overriding concern was to arrest it, this decision is not only surprising, but also suggests a certain incoherence of approach.
• Though the MPC has noted that the policy space exists for future action, with growth unlikely to pick up meaningfully in the near term, and considering the lags in transmission, rather than adopt a wait and watch approach, it should have stayed with its earlier stance of reducing policy rates further.

Several reasons for maintaining status quo:

• The explicit concern was the recent spurt in inflation and inflation expectations. But, the current rise in inflation, led primarily by high food prices, is likely to be transitory.
• According to the RBI’s own projections, it is expected to decline to 3.8-4 per cent in the first half of 2020-21.
• Even the rise in inflation expectations is driven by food inflation and is likely to abate once it moderates.
• And while there is also concern over a rise in core inflation, owing to higher telecom tariffs, this is also likely to be a one-off event.
• In arguing that the pause is due to concerns over inflation, the MPC has indicated that it is interpreting its inflation targeting mandate too narrowly.
• Rather than using the flexibility provided by the 4 plus/minus 2 per cent band, it has chosen to target a fixed rate.

Way forward:

• The other, perhaps more pressing, concern before the MPC is the Centre’s fiscal position.
• The worry that higher government spending, financed by borrowings, could push up inflation and lead to a hardening of rates could have played a major part in this decision.
• It is probable that the MPC wants to utilise the policy space available to it once more clarity over the government’s borrowing programme emerges.
• Though the governor has repeatedly said that the MPC is waiting for the full impact of the previous rate cuts to play out, and that the timing of cuts is important, given the delays in transmission, a more prudent approach would have been to front load the rate cuts.

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Prelims Questions:

Q.1) With reference to the Fit India School grading system, consider the following statements:
1. The level of ranking will depend on how much importance the school gives to inculcating fitness among its students and teachers, besides facilities available for fitness activities.
2. The schools that achieve this ranking will also be able to use the Fit India logo and flag.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: C
Mains Questions:
Q.1) What are the reasons behind Monetary Policy Committee is opting for status quo?