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Reserve Bank Of India

Reserve Bank Of India

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

In news:

  • The worst thing to occur for India’s pandemic-hit economy is accelerating inflation.
  • However, the latest data point to such a precarious situation.
  • June’s retail inflation reading of 6.1% is worrying.
  • Since, it was the first month when the economy reopened from the crippling lockdowns of the preceding two months.

Why an increase of prices:

  • The disruptions caused to the supply of goods and services as a result of the nationwide shutdown can to an extent explain the acceleration in price gains.
  • Transport and communication, which includes petrol and diesel, also posted a 7.1% jump.
  • The recent sustained increase in fuel prices is expected to feed through into higher costs for transporting farm produce and it is therefore hard to envisage food prices softening, at least in the near term.
  • However, this happened despite depressed demand is cause for disquiet.

Food inflation:

  • A closer look at the Consumer Price Index reveals that prices in the food and beverages group rose an average 7.3% year-on-year,
  • With the key protein sources of pulses and products surging 16.7.
  • Meat and fish climbing 16.2%.
  • Milk and its derivatives rising 8.4%.

Moderating inflation:

  • Eventually, Inflation in the food category would have been much faster.
  • But, vegetables and fruits moderated it.
  • This is because anxious growers likely sold the perishables at distress rates resulting in fruits showing a 0.7% deflation and vegetables posting a marginal 1.9% gain.

Sellers raining prices:

  • Still, for now, vegetable prices are reported to be surging and providers of goods and services are exploring ways to insulate their businesses financially from the weak demand.
  • Steel companies recently announced they were raising prices in response to rising costs related to iron ore and the COVID-19 pandemic.
  MPC control on inflation The main responsibility of the MPC will be to keep the inflation targets set by the RBI. The MPC decides the changes to be made to the policy rate (repo rate) to contain inflation within the target (based on CPI) level set under India’s inflation targeting regime.   Members of the MPC can suggest reasons for their support or opposition for a policy rate change.   · In case the inflation target is failed to achieve (2% higher or lower than the set target of 4% for continuous three quarters), the RBI has to give an explanation to the government about the reasons, the remedial actions and the estimated time for realizing the target. · Another responsibility for the RBI is to publish a Monetary Policy Report every six months, elaborating inflation forecasts and inflation sources for the next six to eighteen months.   Repo rate :   · Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. · Repo rate is used by monetary authorities to control inflation.   Its impact on inflation: · In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. · This ultimately reduces the money supply in the economy and thus helps in arresting inflation. · The central bank takes the contrary position in the event of a fall in inflationary pressures.   

Some hopes:

  • The rapid and timely onset of the monsoon in June, with higher rainfall, does offer some reassurance.
  • If the rains sustain the early momentum and cover the key agrarian heartland adequately, the prospects for a bountiful harvest and a resultant moderation in food prices later in the year are bright.

Market outlook:

  • Researcher IHS Markit’s latest India Business Outlooksurvey released on Monday paints a dismal picture with sentiment having turned negative in June for the first time in the 11 years since it began polling businesses in the country, and firms reporting a steep drop in confidence.
  • Significantly, the survey shows that while employers are set to cut jobs to cope with faltering demand, companies also plan to raise selling prices over the next 12 months to protect profitability.

RBI’s Dilemma:

  • A further rate cut to help revive economic momentum risks fanning faster price gains and putting the economy on a path to stagflation.

Source:” The Hindu“.

POSSIBLE UPSC CSE MAINS QUESTION:

With inflation already above the Reserve Bank’s target upper bound, monetary policy makers face an unenviable choice. Examine.