{"id":34770,"date":"2018-10-31T13:14:49","date_gmt":"2018-10-31T07:44:49","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=34770"},"modified":"2018-10-31T13:14:49","modified_gmt":"2018-10-31T07:44:49","slug":"rbi-holds-interest-rates-warns-against-fiscal-laxity","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/rbi-holds-interest-rates-warns-against-fiscal-laxity\/","title":{"rendered":"RBI holds interest rates, warns against fiscal laxity:"},"content":{"rendered":"<p><a href=\"http:\/\/www.thehindu.com\/todays-paper\/rbi-holds-interest-rates-warns-against-fiscal-laxity\/article19799010.ece\"><span style=\"font-weight: 400;\">RBI holds interest rates, warns against fiscal laxity<\/span><\/a><span style=\"font-weight: 400;\">: <\/span><\/p>\n<p><b>Context:<\/b><\/p>\n<p><span style=\"font-weight: 400;\">By holding policy rates, the RBI shifts focus to the government to give a fillip to growth.<\/span><\/p>\n<p><b>Introduction:<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The Reserve Bank of India kept interest rates unchanged citing concerns about the upward risks to inflation and cautioned the government against steps to relax fiscal discipline to spur growth as such a move could adversely impact the deficit and add to inflationary pressure.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">RBI\u2019s Monetary Policy Committee (MPC) trimmed its forecast for economic growth in the current fiscal year in gross value added (GVA) terms to 6.7% and also raised its projected range for CPI inflation in the second half to 4.2-4.6%.<\/span><\/li>\n<\/ul>\n<p><b>What is the reason behind RBI\u2019s decision to keep key policy rate unchanged?<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The various macroeconomic indicators of the Indian Economy have been on the downward spiral in the recent past. In such a scenario, reviving the investor sentiment and the demand is the key focus of the Government.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The Monetary Policy Committee (MPC) of Reserve Bank has decided to keep the key policy rate unchanged as it projects risks to inflation.<\/span><\/li>\n<\/ul>\n<p><b>Factors responsible of economic slowdown:<\/b><\/p>\n<p><b>A number of factors could be responsible for this:<\/b><\/p>\n<p><b><i>1-<\/i><\/b><span style=\"font-weight: 400;\"> \u00a0<\/span> <b><i>Merchandise exports<\/i><\/b><b>:<\/b><span style=\"font-weight: 400;\"> \u00a0One of the major reasons for the current deficit is the greater increase in merchandise imports than export.<\/span><\/p>\n<p><b><i>2-<\/i><\/b><span style=\"font-weight: 400;\"> \u00a0<\/span> <b><i>Increase import of Gold<\/i><\/b><b>:<\/b><span style=\"font-weight: 400;\"> Imports increased because of a rise in demand for gold (almost threefold) due to the upcoming festive season and tweaks in trade pacts with countries such as South Korea.<\/span><\/p>\n<p><b><i>3-<\/i><\/b><span style=\"font-weight: 400;\"> \u00a0<\/span> <b><i>Services<\/i><\/b><b> &#8211;<\/b><span style=\"font-weight: 400;\">Fall in exports of Services due to domestic industry issues and increased protectionism worldwide.<\/span><\/p>\n<p><b><i>4-<\/i><\/b><span style=\"font-weight: 400;\"> \u00a0<\/span> <b><i>Agricultural vows<\/i><\/b><span style=\"font-weight: 400;\"> :Shortage of agricultural goods and lower farm growth due to erratic monsoons, decreased government spending, hoarding, black marketing, inefficient procurement etc.<\/span><\/p>\n<p><b><i>5-<\/i><\/b><span style=\"font-weight: 400;\"> \u00a0<\/span> <b><i>Demonetisation:<\/i><\/b><span style=\"font-weight: 400;\"> The effects of demonetisation such as reduced purchasing power, supply side inflation with decreased procurement of raw material, increased transportation costs, delayed payments, etc. Here, the effects on the real estate and construction sector have been specifically marked.<\/span><\/p>\n<p><b><i>6-<\/i><\/b><span style=\"font-weight: 400;\"> \u00a0<\/span> <b><i>Introduction of GST<\/i><\/b><b>:<\/b><span style=\"font-weight: 400;\"> The consequences of new tax regime such as uncertainty, delayed payments, increase in prices of commodities, increased vows of informal sector, etc.<\/span><\/p>\n<p><b><i>7-<\/i><\/b><span style=\"font-weight: 400;\"> \u00a0<\/span> <b><i>Delayed reforms<\/i><\/b><span style=\"font-weight: 400;\">: \u00a0In<\/span><span style=\"font-weight: 400;\"> the long term, Delayed reforms such as Labour reforms (with no exit policy in India) and liberalisation discourage foreign investors to set up firms in India.<\/span><\/p>\n<p><b><i>8-<\/i><\/b><span style=\"font-weight: 400;\"> \u00a0<\/span> <span style=\"font-weight: 400;\">The complexities of land acquisition, disputes with major countries over IPR regimes also contribute to the weak business sentiment.<\/span><\/p>\n<p><b><i>9-<\/i><\/b><span style=\"font-weight: 400;\"> \u00a0<\/span> <span style=\"font-weight: 400;\">To complicate matters, we have almost nil Privacy laws, an unregulated and haywire e-commerce sector etc.<\/span><\/p>\n<p><b>What does this growth trend imply?<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">There is no urgent requirement to lower any of policy rate<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Central government has more time to observe and analyze the shifting global developments, like higher oil prices and rising interest rates, into domestic fiscal policy.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Once GST-led uncertainties are over, the government should take measures to support growth<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">What are the tools of monetary policy in India?<\/span><\/li>\n<\/ul>\n<p><strong>1- \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Bank Rate:<\/strong><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">A bank rate is the interest rate at which a nation\u2019s apex bank lends money to domestic banks, often in the form of very short-term loans. Managing the bank rate is method by which central banks affect economic activity.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\"><strong>2<\/strong>&#8211;<\/span><span style=\"font-weight: 400;\"> \u00a0\u00a0<\/span> <b>Liquidity Adjustment Facility (LAF):<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Liquidity Adjustment facility was introduced in 2000. LAF is a facility provided by the Reserve Bank of India to scheduled commercial banks to avail of liquidity in case of need or to park excess funds with the RBI on an overnight basis against the collateral of Government securities.<\/span><\/p>\n<p><span style=\"font-weight: 400;\"><strong>3<\/strong>&#8211;<\/span><span style=\"font-weight: 400;\"> \u00a0\u00a0<\/span> <b>Reverse Repo Rate<\/b><span style=\"font-weight: 400;\">:<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Reverse Repo rate is the opposite of repo rate. If a bank has surplus money, they can park this excess liquidity with RBI and central bank will pay interest on this.<\/span><\/p>\n<p><b>4-<\/b><span style=\"font-weight: 400;\"> \u00a0\u00a0<\/span> <b>Marginal Standing Facility (MSF)<\/b><span style=\"font-weight: 400;\">:<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This scheme was introduced in May, 2011 and all the scheduled commercial bank can participate in this scheme. Banks can borrow up to 2.5%percent of their respective Net Demand and Time Liabilities.<\/span><\/p>\n<p><b>Qualitative Tools<\/b><span style=\"font-weight: 400;\">:<\/span><\/p>\n<p><b>Margin Requirements:<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Loan to Value is the ratio of loan amount to the actual value of asset purchased. RBI regulates this ratio so as to control the amount bank can lend to its customers.<\/span><\/p>\n<p><b>Selective credit control<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Under this measure, RBI can specifically instruct banks not to give loans to traders of certain commodities e.g. sugar, edible oil etc. This prevents speculations\/ hoarding of commodities using money borrowed from banks.<\/span><\/p>\n<p><b>Moral Suasion<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Under this measure RBI try to persuade bank through meetings, conferences, media statements to do specific things under certain economic trends.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>RBI holds interest rates, warns against fiscal laxity: Context: By holding policy rates, the RBI shifts focus to the government to give a fillip to growth. Introduction: The Reserve Bank of India kept interest rates unchanged citing concerns about the upward risks to inflation and cautioned the government against steps to relax fiscal discipline to&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/rbi-holds-interest-rates-warns-against-fiscal-laxity\/\">Continue reading <span class=\"screen-reader-text\">RBI holds interest rates, warns against fiscal laxity:<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[555],"tags":[],"class_list":["post-34770","post","type-post","status-publish","format-standard","hentry","category-test-1","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704801838},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/34770","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=34770"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/34770\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=34770"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=34770"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=34770"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}