THE GIST of Editorial for UPSC Exams : 08 FEBRUARY 2019 (The first monetary policy under Shaktikanta Das ticks all the right boxes (Live Mint)

The first monetary policy under Shaktikanta Das ticks all the right boxes (Live Mint)

Mains Paper 4: Economy
Prelims level: MPC
Mains level: MPC highlights

Context

  •  The monetary policy committee (MPC), which sets the policy or repo rate, has to strike the right balance between assessing recent inflation trends and forecasting the future.
  •  Its mandate is to make sure that average inflation is around 4%, though it technically does have a leeway of two percentage points on either side.
  •  This time, the MPC faced a rather unique problem for an economy used to somewhat chronic high inflation inflation prints have been a little too low for its comfort in the past few months.
  •  It might surprise some that extremely low inflation has its own set of problems.
  •  For one, it breeds expectations of a further fall in inflation.
  •  Consumers tend to hold back their purchases, while producers lose the incentive to manufacture, leading to a deflationary spiral.
  •  For India, the last couple of consumer inflation data prints have been dangerously close to the lower end of the target band of 2%.

Background

  •  The decision to cut the policy rate today ticks all the proverbial boxes. First, it recognizes that recent inflation has left enough room for interest rates to fall.
  •  Projections peg consumer price inflation to be well below the 4% mark till the third quarter of 2019-20.
  •  Thus, by cutting rates today it is unlikely to face the immediate whiplash of a spurt in prices.
  •  It does not fret excessively about the so-called core inflation that removes volatile components, such as food and fuel, from the consumer’s basket.
  •  This component has incidentally been considerably higher than the headline.

To reiterate a couple of things

  •  First, that monetary policy works both ways, hiking rates when inflation builds up and lowering it when inflation eases. This should dispel the notion that the RBI is only in the business of hiking rates and chooses to look away when prices soften. This symmetry in rate action was important to establish the credibility of this relatively new policy model.
  •  Second, it hammers home the fact that the RBI has chosen to target the headline CPI, and not one of its components such as core inflation. Some economists cite high core inflation to make a case for holding the policy rate steady. This is not to say that elevated core inflation might not drive headline inflation up in future. However, the RBI’s projections would have taken this interplay into account and the pressure from ‘core is not sufficient to bust the 4% over the RBI’s forecast horizon’.

How does it differ from previous policies?

  •  The growth re-enters the central bank’s vocabulary as something to be cherished and not to be viewed as something that raises the risk of inflation.
  •  The assumption that monetary policy had to necessarily move in the opposite direction as fiscal policy, which underpinned many of the earlier policies, is not strong now. Even with a degree of fiscal expansion, the RBI might be willing to cut rates further if inflation remains within its projected range.
  •  Today’s monetary policy jettisons the ritual of a change in ‘stance’ first followed by a possible cut in the actual rate. In a volatile world like ours, monetary policy cannot afford the languor of a Japanese tea ceremony.

Way forward

  •  It is unfortunate that the cynics will find reason to question governor Shaktikanta Das’s intentions both because of the alleged draft on the RBI’s autonomy and his background as a bureaucrat who worked with the present government.
  •  Thus, some, including those in foreign financial press, see the rate cut as a growth booster that might help the government’s prospects in the impending elections.
  •  Conspiracy theories are dangerous if taken seriously. The hard numbers, both past and projected, made an unqualified case for a rate cut. That’s all there is to it.

Online Coaching for UPSC PRE Exam

General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) Which among the following countries became the first country to issue "Blue Bond" for the development of Marine Sector?
(a) India
(b) China
(c) Mauritius
(d) Seychelles

Ans: D

Mains Questions:
Q.1) The first monetary policy under Shaktikanta Das ticks all the right boxes. Critically analyse.
 

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