General Awareness

April 05, 2018

April 05, 2018 @ 06:03 PM

MICA

Would RBI Rate Cut Ease Inflation?

 
Published : Friday, 13 March, 2015 4:51 PM
 
 
MBA aspirants must be updated with General Awareness on current topics. General awareness topics with analytically drawn conclusions will benefit you in XAT, IIFT, CMAT,  MAT,  Essay writing, General Awareness sections besides in GD & PI.  
 

Would RBI Rate Cut Ease Inflation?

Reserve Bank of India (RBI), which is the country’s central bank, is often found in a perennial dilemma of whether to support growth or control inflation. If interest rate is increased to control the inflation, cost of funding is increased there by making it difficult for the businesses to acquire new capital for the business development and stimulate growth. On the other hand, if RBI decreases the rate of interest to stimulate the economic growth, money supply is increased in the economy which fuels the inflationary forces thereby increasing the prices. When both inflation control as well as growth stimulation are considered as the objectives of the RBI, often RBI fails in both the objectives as it tries to achieve both simultaneously. It’s because neither economic growth nor inflation are exclusively a monetary phenomenon. Nevertheless money plays an important role in both. 

Because of these conflicting objectives, Urjit Patel Committee to “Revise and Strengthen the Monetary Policy Framework” recommended that inflation should be the nominal anchor for the monetary policy framework. The nominal anchor or the target for inflation should be set at 4 per cent with a band of +/- 2 per cent around it. Committee said “RBI must target inflation only. Nothing else; don’t focus on increasing employment, don’t focus on increasing growth, don’t focus on stabilizing rupee-dollar exchange rate. Just focus on one thing and one thing only Inflation”.

Recently, The Ministry of Finance announced that it had come to an agreement with the Reserve Bank of India (RBI) regarding the operational target and procedure for maintaining price stability in India, enforcing the recommendations of the Urjit Patel committee on Monetary Policy Reform. In brief, the RBI has adopted a flexible inflation targeting regime, where it decides and declares a target for inflation usually within a range. The target rate for the RBI is 4 per cent CPI-combined inflation with a range of plus or minus 2 per cent. The agreement also incorporates failure norms for the RBI where if inflation is above 6 per cent or below 2 per cent for three consecutive quarters, it is deemed to have failed, and it is required to state the reasons for its failure and the remedial actions it proposes.   

Right now, the pressure of inflation is not as high as was seen in the past few years thus giving the space to the central bank to reduce the interest rates. For that matter, RBI cut the policy rate on March 4, 2015 from 7.75 per cent to 7.5 per cent. According to the press release by RBI, decision to cut the repo rate was taken on the basis of easing inflation (5.1 per cent CPI in January) and promise of fiscal consolidation. The fall in global crude oil prices too had a relaxing impact on inflation, trade deficit as well as the subsidy budget. Since these factors hint towards the good economic fundamentals, RBI got the opportunity to reduce the interest rates to provide the growth stimulus.

However, many analysts has criticised this move by RBI because rate cut would induce the inflation. But those who support the rate cuts feel that money supply is not the sole cause of inflation but the mismatch of demand and supply are the basic reason for structural inflation. This gap in demand and supply can be filled by either increasing supply or reducing demand. Since neither government nor RBI have much control over the demands of the people, it is easier to fill the gap by augmenting supply. For instance, supply of agriculture produce can be increased by building a chain of cold storages and warehouses. This would increase the shelve life of perishable foods thus increasing the food supply and ultimately easing the food inflation. 

Inflation and economic growth, both affects the common man. But while the inflation affects the common man directly without much time lag, the impact of growth is indirect and also there is a time lag. That why, Arijit Patel Committee has recommended the RBI to target only inflation with some flexibility. However, when a country was plagued by stagflation (stagnation + inflation: existence of inflation and slow economic growth simultaneously) devising a perfect monetary or fiscal policy will always remain a huge challenge.
 
Stay informed, Stay ahead and stay inspired with MBA Rendezvous

Crucial Dates, You Should not Miss

IMI New Delhi
Admissions open for PGDM / PGDM(HRM) / PGDM(B&FS) at IMI New Delhi. Last date to apply is Dec 3rd, 2018.
Birla Institute of Management Technology (BIMTECH)
BIMTECH Admissions Open for 2019.
XIMB, XUB
XIMB, XUB Admissions Open for 2019 at Xavier Institute of Management. Last date to apply December 7th, 2018.
MDI Gurgaon
Admissions Open for PGPM | PGPM-HRM | PGP-IM 2019 at MDI Gurgaon. Last date to apply November 23th, 2018
MICA
Admissions open for PGDM-C 2019-2021.
Goa Institute of Management
Admissions open for 2019-2021 at GIM. Last date to apply is November 30th, 2018
SDMIMD
Admissions open for PGDM 2019-2021 at SDMIMD.
IMT Ghaziabad
Admissions open for 2 Year PGDM and MBA programs at IMT Ghaziabad- Application Deadline is November 22nd, 2018
ICFAI Business School
ICFAI Business School Accepting Applications for IBSAT 2018
Lal Bahadur Shastri Institute of Management (LBSIM)
Admissions open for 2019 at LBSIM, New Delhi. Last date for applying Dec 15th, 2018
TAPMI
Experience@TAPMI Admissions Open for 2019
MDI Murshidabad
Admissions Open for PGP 2019-21 at MDI Murshidabad
SIBM, Bengaluru
Admissions Open for MBA 2019-21 at SIBM, Bengaluru
XLRI
XAT 2019 Registration, Application Ends on November 30th, 2018. Exam Date January 6th, 2019