THE GIST of Editorial for UPSC Exams : 07 February 2020 (On the front foot: On RBI holding rates (The Hindu))

On the front foot: On RBI holding rates (The Hindu)

Mains Paper 3: Economy
Prelims level: Inflation rate
Mains level: Growth in economy and curbing inflation

Context:

• Governor Shaktikanta Das declared that the proceedings of the Monetary Policy Committee, which decided to hold rates, had already been discounted by the market.
• The RBI unleashed several measures that had an electric effect on the markets, driving down bond yields by 10-20 basis points in a matter of a minutes.

Measures taken by RBI:

• The exemption to banks from providing for cash reserve ratio on fresh retail loans disbursed after January 31 to purchase automobiles and residential houses, and to MSMEs, will help banks shave off a part of their costs.
• The introduction of one- and three-year term repos at policy rate of 5.15% for a total of ₹1 lakh crore is also aimed at prodding rates downward as banks now pay 6%-6.5% on deposits.
• The RBI has fine-tuned its liquidity management process in a manner designed to help banks manage their interest costs better.
• Banks really do what the RBI has signalled to them — transmit lower rates to borrowers — depends on various factors, not the least of which is demand for credit.
• The RBI’s statement that it would maintain an accommodative stance “as long as necessary to revive growth” clearly signals its commitment to growth.
• By explicitly saying that there is “policy space available for future action”, the RBI has signalled that there could be at least one more cut in the months ahead in this rate-easing cycle.
• The decision to extend the one-time restructuring of MSME loans, linking pricing of loans to medium enterprises to an external benchmark, and the nod for permitting extension of date of commencement of commercial operations for loans to commercial real estate that raise questions of excessive forbearance but will certainly help the industry.
• The inflation projection — 6.5% in the current quarter and 5.4%-5.0% in the first half of 2020-21 — reflects the current realities.
• The projected GDP growth of 6% for 2020-21 appears achievable, assuming that the nascent signs of recovery sustain.

Way forward:

• The RBI has gone on the front foot to boost growth in this policy after the conservative Budget presented last week. It is to be hoped that these steps will change the sentiment in the economy.

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Prelims Questions:

Q.1) With reference to the Sustainable Development Fee (SDF), consider the following statements:
1. The Bhutanese Government has decided to levy a daily ₹1,200 ($17) fee for “regional tourists” from India, Nepal, the Maldives and Bangladesh, beginning July 2020.
2. It is meant to help the government deal with burgeoning numbers in tourist traffic, which it is seeking to regulate through a new tourism policy.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both
(d) None

Answer: B
Mains Questions:
Q.1) What are the steps can do the RBI to boost growth that could change the sentiment in the economy?