RBI’s Accommodative Policy Stance | UPSC
Inflation’s import in monetary matters
WHY IN NEWS:
Why has the RBI kept key rates unchanged in its latest announcement?
SYLLABUS COVERED: GS 3:Economy : RBI
For PRELIMS there are few important definitions you will come across this article . Note them in your Prelims book .
For MAINS how does RBI tackle inflation through MPC ? Let us dive in !
RBI’S ACCOMMODATIVE POLICY STANCE
- The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Friday announced its decision to hold the benchmark repo rate unchanged at 4%.
- MPC observed that inflation was likely to remain elevated, “barring transient relief in the winter months from prices of perishables”.
- This, it stressed, “constrains monetary policy at the current juncture from using the space available to act in support of growth”.
Inflation rate from July 2019 to July 2020 | SOURCES : STATISTA
WHAT IS THE PROJECTION ON CPI INFLATION?
- The rate-setting panel noted that the recovery appeared to be “far from being broad-based”.
- Consumer Price Index (CPI) inflation, the RBI said, would average 6.8% for Q3 and 5.8% in Q4.
- Both levels above or close to the 6% upper bound of the target range for ensuring price stability.
- Earlier, it was easing to a 5.2% to 4.6% range in the first half of the next financial year, starting April 2021.
HOW DOES INDIA MEASURE RETAIL INFLATION?
- Inflation is the rate of change in the prices of a given set of items.
- India bases its retail inflation metrics on the Consumer Price Index (CPI).
- The index records changes in prices for a sample of family budget items that are representative of what consumers typically spend their household income on.
- The measure is based on a weighted average.
- That is, some items in the index may get greater weightage depending on their priority in a typical family’s budget.
- The CPI-based retail inflation is measured monthly.
- It is published as a percentage value of change in the index from the corresponding year-earlier period.
- Data for a certain month are released by the Ministry of Statistics and Programme Implementation generally on the twelfth day of the subsequent month.
WHY IS FASTER INFLATION A CONCERN FOR POLICYMAKERS?
- Faster retail inflation is indicative of prices of household items rising quickly.
- While inflation affects everyone, it is often referred to as a ‘tax on the poor’ as the low-income stratum of society bears the brunt.
- A poor household is often forced to sharply reduce or forgo its consumption of this key source of essential nutrients, including carbohydrates.
- Over time, if unchecked, persistent high inflation erodes the value of money .
- Higher inflation hurts several other segments of the population, including the elderly living off a fixed pension.
- It hence ends up undermining a society’s consumptive capacity, and thereby, economic growth itself.
WHAT IS THE RBI’S ROLE IN TACKLING INFLATION?
- The RBI’s explicit mandate is to conduct monetary policy.
- Price stability is a necessary precondition to sustainable growth.
- In 2016, the Reserve Bank of India Act, 1934, was amended to provide a statutory basis for the implementation of a flexible inflation-targeting framework.
- Under this, 4% was set as the Consumer Price Index (CPI) inflation target for the period from August 5, 2016, to March 31, 2021.
- Also, with the upper tolerance limit of 6% and the lower tolerance limit of 2%.
- To ensure price stability as its primary goal, the RBI through its MPC must constantly assess current levels of inflation.
- Also it assesses prices of various goods and services in the economy.
- It also take into consideration inflation expectations both of consumers and financial markets.
- RBI uses an array of monetary tools, including interest rates, to contain inflation within its target range.
WHAT IS CORE INFLATION AND WHY IS IT IMPORTANT?
- The RBI’s action on rates, however, affects the economy with a lag, by which time the spikes in the price of those food items may have reversed.
- Viewing inflation after stripping out such volatility helps give it a better picture of the underlying trend in prices.
- In Friday’s statement, the MPC noted: “Cost-push pressures continue to impinge on core inflation, which has remained sticky and could firm up as economic activity normalises and demand picks up.”
SOURCES: THE HINDU | RBI’s Accommodative Policy Stance | UPSC