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Q. RBI’s recent policy decision: Comment on sixth bimonthly monetary policy of central bank.
Feb 11, 2017 Related to : GS Paper-3

Ans :

Introduction-

Reserve Bank of India in its sixth bimonthly has kept policy rates unchanged. All six members of monetary policy committee unanimously took the decision to hold its policy rates, rather than to slash them by a quarter of a percentage point, as had been widely expected. 

Reasons to keep policy rates unchanged-

  • The main reason behind holding policy rates unchanged is volatile macroeconomic environment emanating from global developments.
  • The America’s decision to withdraw from its extra-easy monetary policy and increasing rates are expected to follow through several times later this year.
  • The global oil prices are on the path of increasing which will have direct impact on commodity prices.
  • Similarly possible higher yields in the advanced markets induce some relocation of capital to these markets from emerging markets that would weaken emerging market currencies, including the rupee.
  • These above aspects would feed into inflation by raising imported energy and other commodity prices, hence RBI kept policy rates unchanged.

Analysis-

  • In the backdrop of demonetisation, the RBI expects growth to be lower this fiscal as well as in the next, as compared to previous estimates.  
  • Investment is getting affected due to mounting burden of bad debt on the banking system, which would make the banks reluctant lenders and Indian industry, reluctant borrowers.
  • In this backdrop RBI has kept policy rates unchanged. And it has implicit assumption that, it is not the high cost of money that holds back investment in the country, rather it is volatile macroeconomic environment is affecting the investment. 

Conclusion-

Monetary policy committee keeping various macroeconomic conditions and global turmoil has kept policy rates unchanged. The RBI’s policy decision has justified on various grounds, it’s not the high cost, but other factors are affecting investments in India. Hence it is time to create conducive macro-economic environment.


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