RBI Monetary Policy : Measures To Revive Economic Growth

Comments (0)

The New Governor of RBI, Raghuram Rajan announced his first Monetary Policy Review which was hailed as "well structured one" by the analysts. Some key policy decisions were :

  • Hike in the interest rates : repo rate by 25 basis points (not for short term but a long term initiative) ; Marginal Standing Facility Rate (MSF) reduced by 75 basis points (it was raised previously because it was driving down the value of rupee).
  • CRR has also been reduced.
  • Basic emphasis in the credit policy has again refocused to “inflation” (from containing Rupee slide).

Market Reaction to policy

  • Market reacted adversely to these initiatives reflected by fall of Sensex (though according to experts sensex is not the real “barometer” Of development)
  • Industry has been asking for softer loans. But the rising interest rates have sent adverse signals to industries.

Analysis :

  • According to experts real inflation in India is not linked to industrial production and supply but actually to agricultural production. It is evident from the fact that while other Inflationary Index are rising industrial inflation has actually gone down. Since it is also held that there is not so strong connection between interest rates and agricultural production, increasing interest rates is not helping much.
  • Growth drivers in the economy are not given proper attention. Index of Industrial Production is (IIP) flat & its segments are contracting.
  • Actually, when growth declines, input/import and consequently Current Account Deficit (CAD) should come down but reverse is true in our case because there is demand in the economy.
  • Monetary intervention has limited solution base i.e. its domain of influence is limited. Present inflationary situation can only be curbed through supply side intervention like increasing manufactured and agricultural good’s production and making their availability easier.

AUSTERITY MEASURES AND FISCAL DEFICIT

Austerity measures refer to official actions taken by the government, during a period of adverse economic conditions, to reduce its budget deficit using a combination of spending cuts or tax rises.

  • It is symbolic since the amount of saving from these measures will not be much but it sends out signals that government is serious about controlling the non-plan expenditure.
  • There is an urgent need for decreasing the number of government members/officials (a bold decision which government doesn’t want to touch).

Fiscal deficit is a situation when government's total expenditure exceeds the revenue that it generates (excluding money from borrowings). Deficit differs from debt, which is an accumulation of yearly deficits. Subsidies have to be decreased to control fiscal deficit under nonplan expenditure (70% of budget is constituted by it).

  • Government has tried to fulfill its internal & external loan obligations by way of swapping windows when interest rates goes down. However success was met only with external loans as dealings involved sovereign nations . Internal loans were hard to full fill considering that these banks have loans in the form of government bond which if taken by this way was going to hamper bank’s balance sheet.
  • The main problem related to CAD is the way in which we finance CAD. CAD is mainly being financed by volatile financial force (like Foreign Institutional Investors). we need to have non-volatile and sustainable policy methods to finance CAD i.e. through decreasing imports, increasing exports and Foreign Direct Investment. Experts also advise to give impetus to green field projects & solve the environmental & rehabilitations concerns which will boost industrial production.
Practice Questions
Q1
Q.no:-1/5