Day 15 – Q 1. Do a brief critical evaluation of RBI’s monetary policy during the pandemic. (10 Marks)

1. Do a brief critical evaluation of RBI’s monetary policy during the pandemic. (10 Marks)

महामारी के दौरान आरबीआई की मौद्रिक नीति का संक्षिप्त समालोचनात्मक मूल्यांकन करें।

Approach-

Candidates need to write about the important role of RBI during pandemic. Then simply critically evaluate the monetary policy. 

Introduction–

Monetary policy refers to the policy of the central bank – ie Reserve Bank of India – in matters of interest rates, money supply and availability of credit. RBI uses various monetary instruments like REPO rate, Reverse RERO rate, SLR, CRR etc to achieve its purpose. 

Body

• As the monetary authority, the Monetary Policy Committee (MPC) laid a triple objective of mitigating negative effects of the virus, reviving growth and preserving financial stability. 
• To ease economic hardship while keeping inflation in check, the RBI slashed interest rates keeping the policy repo rate at a low of 4%. 
• The cash reserve ratio (CRR) was lowered, which provided additional liquidity to help aid banking system. 
• The goal was to ensure that no part of the financial system faced liquidity concerns or credit constraints.
• To ensure that governments did not have to cut their spending due to shortfalls in revenue, RBI needed to enable both central and state government to borrow adequately in debt markets. 
• RBI purchased about 30% of central government’s net market borrowings in FY 2021 and has committed to continue to purchase substantial amounts in FY 2022 through the G-sec Acquisition Programme.

Critical evaluation of Monetary policy functions of RBI:

• Supply chain disruptions: The MPC uses CPI inflation to adjusts its policy rates. However, the CPI doesn’t factor the rise in inflation driven by supply-chain dislocations. For example, restriction on movement resulted into a shortage of essentials.
• Informal Indian economy: The monetary policy affects only around 60% of loans/credit in the Indian economy which are sourced from formal channels (Banks and NBFCs).
• Weak policy transmission: Both the government and the RBI are concerned that the cumulative easing has not yet been reflected in the lowering of their lending rates by banks.
• Limitation of Inflation targeting: Inflation has been accompanied by declining borrowing in the formal sector likely affecting investment leading to rise in unemployment (according to NSSO, unemployment in India has been highest in the last 45 years).
• Triangular balance-sheet: In the aftermath of the IL&FS default in 2018, an additional dimension of liquidity and solvency of the NBFC sector has been added to the prevailing twin balance-sheet problem. Borrowing easy money cannot solve governance issues.
• Gold economy: The Indian household saves in gold/jewelry rather than financial instruments. This curtails RBI from effectively circulating money in the economy.

Way forward:

• Develop a legal process to ascertain RBI’s responsibilities and accountability.
• Ensuring RBI’s autonomy: The governor should be made responsible and accountable to Parliament. The RBI act should be amended to provide a guaranteed tenure of the governor and deputy governors for their effective functioning.

Conclusion

There is need to look at an indicator of inflation that excludes food and fuel and include structural factors responsible for price rise. Also there should be mutual cooperation and coordination between RBI and Government in large at public interests for an efficient and sustainable economy.