THE GIST of Editorial for UPSC Exams : 12 October 2020 A dovish stance (Indian Express)

A dovish stance (Indian Express)

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

Context:

•     In its first meeting, the newly reconstituted monetary policy committee chose to maintain the status quo on the benchmark repo rate.
•     Yet the tone of the policy statement was dovish on several counts.

Expecting reduction in inflation:

•     First, despite the consternation over elevated inflation, the new MPC is viewing the current inflation hump as “transient”, and has attached primacy, rightly so, to growth concerns. 
•     Second, the committee has stated its intention to maintain an accommodative policy stance well into the next financial year in order to stimulate economic activity. 
•     Third, with the central bank expecting inflation to trend lower at around 4.5-5.4 per cent in the second half of the current year— it opens up space for further monetary easing down the road. 
•     RBI expects a further decline to 4.3 per cent in the first quarter of the next financial year — well below the 6 per cent upper limit of its inflation targeting regime 

Slew of measures:

•     Alongside, the RBI announced a slew of measures aimed at ensuring smooth passage of the enhanced borrowing programme of both the Centre and states. 
•     It is also aimed at reducing the volatility in interest rates, and easing the flow of funds to different segments in the economy. 
•     First, it has increased the size of its open market operations to buy government bonds to Rs 20,000 crore, up from around Rs 10,000 crore currently. 
•     Second, the held-to-maturity limit for banks will remain at 22% till March 31, 2022. 
•     Third, the central bank will, for the first time, be conducting open market operations for state government bonds. 
•     Fourth, an on-tap targeted long-term repo operation (TLTRO) of Rs 1 lakh crore has also been announced. 
•     These announcements are likely to help calm the markets in light of recent signals that have emanated from the government’s bond auctions which indicated the market’s increasing discomfiture with the absorption of government debt. 
•     RBI has been calling upon its powers of moral suasion to goad markets participants to take a broader time perspective.
•     The measures announced are likely to persuade buyers of government paper, help lower the spread of state bonds over G-sec, and push credit flow to desired segments of the economy as and when demand for credit picks up. 
•     Responding to these announcements, the 10-year benchmark yield dropped by 8 basis points during the day.

Way ahead:

•     The central bank also provided clarity over the state of the economy by releasing its forecast of economic growth for the first time since the onset of the COVID-19 pandemic. 

•     For the full year, the RBI expects the economy to contract by 9.5%, but the pace of contraction is expected to ease considerably over the second and third quarter. 

•     However, there continues to be concern over the durability of the pick-up in economy activity. 

•     There are questions over the resilienceof household demand after the festive season and lingeringuncertainty over the spread of the pandemic.

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Prelims Questions:

Q.1) With reference to the Yamin Hazarika award, consider the following statements:
1. Historian-author Rana Safvi has been conferred Yamin Hazarika award
2. Yamin Hazarika was the first woman from the Northeast to join the central police service

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 roles of Monetary Policy Committee in maintaining liquidity in the market?