Signalling optimism: On RBI holding rates (The Hindu)

Mains Paper 3: Economy 
Prelims level: Monetary Policy Committee
Mains level: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment 

Context:

•     The RBI has used its latest monetary policy review to unequivocally indicate that it will prioritize the revival of economic growth over inflation, at least through the end of the current financial year.

Accommodative stance:

•     The bank’s reconstituted Monetary Policy Committee (MPC), with three new external members, unanimously voted to keep policy interest rates unchanged. 
•     It categorically stated that the RBI would “continue with the accommodative stance as long as necessary to revive growth on a durable basis and mitigate the impact of COVID-19 on       the economy”. 
•     Interestingly, the MPC tilted away from its inflation targeting mandate by downplaying the risks on the price pressures front. 
•     It assessed that supply shocks were mainly responsible for keeping inflation above the tolerance band for months. 
•     These shocks, it posited, should dissipate as the economy unlocks, supply chains are restored, and activity normalises. 
•     As part of the shift in priority it also made bold to project that it would stick with the accommodative stance “at least during the current financial year and into the next financial year”. 
•     The MPC’s majority view of ensuring a ‘dovish’ position on interest rates for at least six months has left it little near-term leeway to tame price pressures.

Need to stabilise:

•     RBI Governor Shaktikanta Das went to great lengths to emphasise that the current ‘inflation hump’ was a transientphenomenon. 

•     He said it needed to be looked through when taking measures to support the ‘emerging impulses’ and helping the economy return to its feet. 

•     Through a series of liquidity enhancing and credit flow supportive steps, the central bank reiteratedits commitment to maintaining stability in the financial markets. 

•     Resources-strapped Central and State governments are expected to resort to substantially higher levels of borrowing to meet their spending needs. 

•     There can certainly be no argument at this point that the economy needs all the support it can get to recover from its 23.9% estimated contraction of the first quarter. 

•     The RBI sees a gradual recovery, forecasting a marginal growth of 0.5% in the fourth quarter that would narrow the full-year contraction to 9.5%. 

•     It is the inflation assumptions, however, that cause disquiet. From a projection of 6.8% for Q2, CPI inflation is posited to sharply ease — 5.4% in Q3 and 4.5% in Q4. 

Conclusion:

•     In overlooking the risks that the persistence of supply bottlenecks, cost-push pressures from higher taxes on transport fuels and the possibility of food-price inflation becoming entrenchedpose to the outlook on          prices, the RBI has clearly sought to talk up confidence.
•     The RBI has clearly sought to talk up confidence ignoring the risks of inflation.

Online Coaching for UPSC PRE Exam

E-Books Download for UPSC IAS Exams

General Studies Pre. Cum Mains Study Material

Prelims Questions:

Q.1) With reference to the World Maritime Day 2020, consider the following statements:
1. World Maritime Day 2020 was observed on 24 September.
2. The Theme for this year is “Sustainable Shipping for a Sustainable Planet”.
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)Highlights the reasons behind the policy interest rates being unchanged by the RBI.