IASbhai Daily Editorial Hunt | 3rd Nov 2020
“Limitations live only in our minds. But if we use our imaginations, our possibilities become limitless.” – Jamie Paolinetti
EDITORIAL HUNT #221 :“ 11 Monetary Policies Decisions in the Pandemic | UPSC ”
11 Monetary Policies Decisions in the Pandemic | UPSC
Puja Mehra is a Delhi-based journalist and author of The Lost Decade
Reinforcing RBI’s accountability
It must abide by the law and apprise the Centre of why it failed to control inflation
SYLLABUS COVERED: GS 3 : RBI : Monetary Policy
Discuss the Impact of Monetary Policy changes during the pandemic on the macro-economic stability of India . Provide your opinion for collecting precision data. -(GS 3)
- Inflation levels
- MPC during the Pandemic
- Data limitations
- Way Forward
- INFLATION TOLERANCE : Popular narrative suggests that the Central government led by Prime Minister Narendra Modi has a low tolerance for inflation.
- REPO RATE – RBI announced that it was cutting the repo rate by 75 bps, or 0.75% to 4.4. The Repo Rate was earlier 5.15; last being cut in October 2019.
- INFLATION LEVELS : Inflation, as measured by the consumer price index (CPI), was 6.7% in the January-March quarter, 6.6% in the April-June quarter (based on imputed data) and 6.9% in the July-September quarter.
- AVERAGE INFLATION : At 5.8%, the average inflation rate for the October-December 2019 quarter was also within a hair’s breadth of the upper tolerance limit.
MONETARY POLICIES DURING THE PANDEMIC
- REVERSE REPO : The regulator also announced that it would cut the Reverse Repo rate by 90 bps, or 0.90%. On a daily average, banks had been parking Rs 3 lakh crore with the RBI. The current reverse repo rate was 4%.
- LOAN MORATORIUM – In a massive relief for the middle class, the RBI Governor also announced that lenders could give a moratorium of 3 months on term loans, outstanding as on 1 March, 2020.
- CRR : The RBI also announced that the Cash Reserve Ratio (CRR) would be reduced by 100 bps, or 1%, to 3% . This would be applicable from March 28, and would inject Rs. 1,37,000 crore.
- LTRO : The RBI will also undertake Long Term Repo Operations (LTRO); allowing further liquidity with the banks.
- EASE OF WORKING CAPITAL FINANCING : Lenders were allowed lending to recalculate drawing power by reducing margins and/or by reassessing the working capital cycle for the borrowers.
- WORKING CAPITAL INTEREST : A Three month interest moratorium shall also be permitted to all lending institutions.
- DEFERMENT OF NSFR– The Net Stable Funding Ratio (NSFR), which reduces funding risk by requiring banks to fund their activities with sufficiently stable sources of funding was postponed to October 1, 2020.
- MSF – Marginal Standing Facility (MSF) has also been increased to 3% of SLR, available till June 30, 2020.
- FRESH LIQUIDITY – The impact of all the announcements today shall inject almost 3.2% of GDP.
- MPC’s LIQUIDITY BOOST : With elements both within and outside government, has been injecting confusion into the discourse on the desirability of persisting with the inflation-targeting regime.
- NOMINAL AVERAGES : High inflation makes all that is measured in nominal terms appear rosier — like business revenues and profits, or tax collection figures in the Finance Ministry’s budget arithmetic.
- DATA LIMITATIONS : Monetary Policy Committee (MPC) meeting after its August policy review suggest that the RBI’s defence for the breach of the 4% inflation target and 6% upper tolerance limit was the handicap of data limitations.
- NSO”s SHUTTER DOWN : The normal data collection exercise of the National Statistics Office was disrupted during the lockdown imposed due to the COVID-19 pandemic.
- IMPROVISED VERSION OF CPI : This leads to conclude that the improvised prints ought to be regarded as a break in the CPI series for the purpose of monetary policy decisions.
- STEEP INFLATION GRAPH : The data for the last four quarters — 5.8%, 6.7%, 6.6%, 6.9% — appears continuous.
- RESUMING DATA COLLECTION : MPC notes, once the COVID-19-related restrictions were lifted , activities partially restored, data collection resumed, allowing for the provisional index for June to be compiled.
- LIMITATIONS : The range around the inflation target that the Ministry provided to the RBI is for accommodating constraints and challenges like data limitations.
- ACCOUNTABILITY : Transparency can enable more informed decision-making within the government, greater public scrutiny of the RBI’s performance, and an improved inflation-targeting regime.
SOURCES: THE HINDU EDITORIAL HUNT | 11 Monetary Policies Decisions in the Pandemic | UPSC