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Q. Macro-economic stability: Why macro-economic stability is more important than mere taming Inflation. Discuss.
Aug 09, 2016 Related to : GS Paper- 3

Ans :

Introduction-

In a recent period of times RBI and government has undertaken various actions to realise macro-economic stability in general and inflation in particular through various monetary policy actions. For example, Inflation targeting has been rolled out with the notification by the government of the Monetary Policy Committee (MPC) and its objective of holding inflation in the range 2-4%.

Issues-

  • Price stability is indeed an important function of monetary policy. But the formalisation via MPC of inflation targeting as the central objective of monetary policy is not exactly as desired.
  • Policy makers are not cribbing about growth being given short shrift. In a globalising world, in which India’s financial market is buffeted, even with partial convertibility of the rupee on the capital account, by the storms of global finance, financial stability is a prime concern.
  • Interest rates are part of the armoury of macro prudential regulation. The goal of price stability is not necessarily misaligned with the goal of financial stability, but the pace of policy change required for pursuing either goal could be different from that required for the other.

Suggestions-

  • Instead of letting fiscal policy adjust to monetary policy taken as a given, there would be occasions when the RBI and the finance ministry have to work in tandem to check financial instability.
  • A simple mandate to rein in prices elides the nuanced complexity of setting monetary policy in a financially interdependent world.
  • The consumer price index (CPI) is hardly the best guide for monetary policy. Food and fuels account for more than half its total weightage. Either can trigger a price spurt, due to a supply shock, which just cannot be addressed by a rate increase.

Conclusion-

Taming the inflation is most necessary for overall macro-economic stability, but it won’t suffice. Hence it needs comprehensive approach than mere containing inflation. In this direction government and RBI should look into this so address the issues effectively.


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