UPSC CSE Mains Syllabus -GENERAL STUDIES-3-Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Inflation Targeting Vs Growth – way forward for RBI

The current macroeconomic backdrop offers little comfort for the newly-constituted Monetary Policy Committee (MPC) ahead of their meeting that began today.

Not only did economic activities record an unprecedented 24 per cent year-on-year (YoY) contraction during the first quarter of the financial year, further contractions in GDP during the remaining quarters of the financial year cannot be ruled out as well.

Near-failure in inflation targeting:

What it has do:

Complex situation:

Nature of inflation:

Conservative vs Accommodative stance:

Economic growth contraction:

What is needed:

Central Bank may consider,

  1. elongating the maturity profile of government’s liabilities, especially given the current low interest rates
  2. issuing larger quantum of securities in the benchmark 10-year bucket to ensure better liquidity in this segment, apart from
  3. stepping up OMO purchase during H2 FY 20-21.
  4. Furthermore, targeted liquidity operations – like the TLTROs that RBI offered this summer – can play a key role in providing focused support to various sectors of the real economy, including the lower end of the economic pyramid such as microfinance, MSMEs and affordable housing.

These segments have started exhibiting signs of turning a corner, and can attain further resilience and growth with meaningful and targeted policy support.

Relatively modest targeted liquidity support in these areas cannot only have the potential to immediately offer a cushion to a large number of people at the relatively less privileged segments of the society, but also reduce the need for further fiscal support for these segments over the medium term.

Source: ”Economic Times”.

POSSIBLE UPSC MAINS EXAMINATION:

Reserve Bank of India is facing a complex situation as inflation has been rising but growth is contracting. Discuss the various measures that it could take to combat them.