Source-This post on RBI’s Monetary Policy Amid Global Economic Uncertainty has been created based on the article “RBI has wisely charted a course that’s unique to India’s economy” published in “Business Standard” on 9 August 2024.
UPSC Syllabus-GS Paper-3– Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.
Context- Recent US employment data showed slower hiring and the highest unemployment rate in nearly three years, causing global stock markets to fall and raising fears that the Federal Reserve had delayed rate cuts too long. This increased concerns about a US recession led to expectations of a change in RBI policy or a softer tone. However, RBI decided to keep their current policy unchanged.
What were the reasons for the RBI’s decision to keep the policy rate unchanged?
1) Policy Focused on Domestic Inflation Target– RBI Governor decided to keep the current policy. He stressed that the RBI’s decisions are based mainly on domestic factors, not global market conditions. The RBI’s main goal is to keep headline inflation at India’s 4% target.
2) US Recession Predictions and Inflation Control– RBI Governor stated that it is premature to predict a US recession and highlighted that the RBI remains dedicated to controlling inflation while monitoring all relevant data.
3) Core Inflation and Food Exclusion Debates -The RBI will not be influenced by low core inflation rates or discussions about excluding food from inflation targets. Although core inflation dropped to 3.1% in May-June, overall retail inflation increased to 5.1% in June. This suggests that inflation may decline more slowly than anticipated.
4) Inflation Expectations -High food inflation, which constitutes 46% of consumer spending, presents serious risks. It can increase other prices, impact core inflation, and influence public perceptions and future inflation expectations, resulting in more enduring inflation.
Read More– Inflation Targeting in India
5) Persistent High Food Inflation– According to the RBI Governor, the MPC cannot overlook ongoing high food inflation, even if it appears temporary. The RBI is committed to not repeating past mistakes of underestimating inflation.
Question for practice
What were the reasons for the RBI’s decision to keep the policy rate unchanged?
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