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Q. Fifth bimonthly monetary policy statement: comment on recently release fifth bimonthly monetary policy statement.
Dec 08, 2016 Related to : GS Paper-3

Ans :

Introduction-

Recently Monetary Policy Committee headed by Governor of Reserve Bank of India has released its fifth bimonthly monetary policy statement. MPC has decided to to hold the policy rate at 6.25% citing uncertainties emanating from both domestic and global developments.

Analysis of recent monetary policy statement-

  • In the backdrop of an imminent USA’s Federal hike, the global uncertainty, as also the difficulties in assessing the macroeconomic impact of demonetisation on the domestic economy, the members of MPC have unanimously chosen to wait and watch and not make any changes in the policy rates.
  • Global uncertainties like, the imminent tightening of USA’s monetary policy and the rise in oil prices, and disconcerting domestic inflation trends that could potentially endanger its price stability goals.
  • Currently rupee is facing volatility against the dollar. The exchange rate has the potential to exert upward inflationary pressure as a bulk of the country’s commodity imports, including crude oil, are largely paid for in dollars, the MPC had little choice but to ensure that at least interest rates don’t end up being another alibi for capital outflows.
  • In domestic front, inflation excluding food and fuel has stubbornly displayed a downward inflexibility that could, coupled with volatile energy costs and further financial market turbulence, might jeopardise the RBI’s retail inflation target of 5%.
  • Under these circumstances MPC has decided to keep policy rates unchanged, considering the various uncertainties MPC decision makes an eminent sense. 

Conclusion-

The MPC has adopted a wait and watch approach by keeping policy rates unchanged. It is understandable that the MPC has opted for caution. Considering the various uncertainties in and around the world, MPC has chosen the path accommodative policy stance. 

 


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