PRUDENCE PREVAILS: ON KEEPING MONETARY POLICY DISINFLATIONARY

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THE CONTEXT: The Reserve Bank of India’s Monetary Policy Committee (MPC) decided to keep the repo rate unchanged at 6.5% for the sixth consecutive meeting. The MPC’s decision is influenced by uncertainties in food prices, which continue to affect the headline inflation trajectory. The recent trends in retail inflation and the potential impact of food price gains on inflation expectations are also highlighted.

ISSUES:

• Monetary Policy and Inflation Control: The RBI’s Monetary Policy Committee has kept the repo rate unchanged at 6.5% for the sixth consecutive meeting. The committee is committed to maintaining a monetary policy to reduce inflation and stabilize prices.
• Food Prices and Inflation: Food prices greatly impact inflation. In December, retail inflation was 5.69% due to uncertainties. The Consumer Food Price Index rose 9.53%, much higher than October’s 6.61%.
• Inflation Projections and Policy Response: The MPC has predicted that retail inflation in the first quarter of the year will be around 5%. To meet the target of 4%, policymakers must keep up their efforts to control price increases.
• Economic Growth and Consumption: Despite inflation, the economy remains strong. However, high inflation could negatively impact growth by reducing consumption.
• Food Prices as Core of India’s Inflation: Food prices can sometimes increase in a way that affects inflation similarly to other basic goods. This can lead to people expecting more price increases, undermining the goal of stabilizing prices.

THE WAY FORWARD:

• Monetary Policy Measures: The Reserve Bank of India (RBI) can employ various monetary policy tools to control inflation. These include adjusting the Repo Rate, Reverse Repo Rate, and Bank Rate and employing Open Market Operations, Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), and Liquidity Adjustment Facility (LAF). However, it’s important to note that while these measures can help manage inflation, they are not a complete solution and have limitations.
• Investment in Infrastructure: Road infrastructure can foster efficient and stable food markets, which can help stabilize food prices.
• Crop Diversification: Diversifying the types of crops grown can help stabilize the yield of the crops in the system, which can help control food prices.
• Improving Supply Chain Management: Short-term food inflation is often caused by limited yield or poor supply chain management. Therefore, improving supply chain management can help control food inflation.
• Providing Targeted and Flexible Food Safety Nets: This can ensure access to healthy diets and national food security, particularly for the most vulnerable groups.
• Addressing Long-Term Threats to Food Production: These include water scarcity, soil degradation, the environmental impacts of climate change, and competition for productive land due to urban expansion.
• Regulating Biofuels: Biofuels add stress to the weak supply and demand equilibrium of world food market commodities, so regulating them could help reduce food price volatility.
• Strengthening the Supply Side: It is necessary to strengthen the supply side rather than concentrate only on the demand side. The RBI can lay certain regulations to direct funds for improvement in supply.

THE CONCLUSION:

The MPC’s decision reflects its commitment to ensuring that inflation aligns with the target of 4%, particularly in the face of volatile food prices. However, the article suggests that policymakers must remain steadfast in their resolve to slow price gains towards the target or risk dampening consumption and undermining growth momentum. There is a need for a balanced approach to manage inflation while supporting economic growth.

UPSC PAST YEAR QUESTION:

Q. Do you agree that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (2019)

MAINS PRACTICE QUESTION:

Q. Discuss the impact of keeping the repo rate unchanged on the various sectors of the economy, considering the current inflationary trends and the need for economic growth.

SOURCE:

https://www.thehindu.com/opinion/editorial/prudence-prevails-on-keeping-monetary-policy-disinflationary/article67828996.ece