{"id":76349,"date":"2021-01-12T11:08:26","date_gmt":"2021-01-12T05:38:26","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=76349"},"modified":"2021-01-12T11:38:14","modified_gmt":"2021-01-12T06:08:14","slug":"rbis-expansionary-policy-and-challenge-of-the-impossible-trinity","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/rbis-expansionary-policy-and-challenge-of-the-impossible-trinity\/","title":{"rendered":"RBI\u2019s expansionary policy and challenge of the impossible trinity"},"content":{"rendered":"<p><b><span data-contrast=\"none\">Synopsis:\u00a0<\/span><\/b><span data-contrast=\"none\">RBI need to exit out of its expansionary policy and manage\u00a0<\/span><b><span data-contrast=\"none\">\u2018the impossible trinity\u2019, i.e. Capital inflow, inflation and exchange rate.<\/span><\/b><\/p>\n<p><b><span data-contrast=\"none\">Source:\u00a0<\/span><\/b><a href=\"https:\/\/epaper.thehindu.com\/Home\/ShareArticle?OrgId=GDV85JITB.1&amp;imageview=0\"><b><span data-contrast=\"none\">The Hindu<\/span><\/b><\/a><b><span data-contrast=\"none\">\u00a0\u00a0<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:257}\">\u00a0<\/span><\/p>\n<p><b><span data-contrast=\"none\">Introduction<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:257}\">\u00a0<\/span><\/p>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li data-leveltext=\"\u00b7\" data-font=\"Symbol\" data-listid=\"7\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"none\">RBI adopted the extraordinary expansionary policy after Covid-19.\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}\">\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li data-leveltext=\"\u00b7\" data-font=\"Symbol\" data-listid=\"7\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"none\">It reduced policy interest rates aggressively to increase the liquidity in the market. It also provided targeted assistance to especially distressed sectors.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\u00b7\" data-font=\"Symbol\" data-listid=\"7\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">But,\u00a0now RBI should consider an exit plan out of expansionary policy to avoid any loss in the macroeconomic terms.<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\u00b7\" data-font=\"Symbol\" data-listid=\"7\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><span data-contrast=\"auto\">In this process RBI might face the challenge of managing\u00a0<\/span><b><span data-contrast=\"auto\">\u2018the impossible trinity\u2019,\u00a0<\/span><\/b><span data-contrast=\"auto\">i.e.<\/span><b><span data-contrast=\"auto\">\u00a0 Keeping doors open for capital flows while simultaneously maintaining a stable exchange rate and restraining inflation.<\/span><\/b><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}\">\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><b><span data-contrast=\"auto\">What are the challenges in managing \u2018the impossible trinity\u2019<\/span><\/b><b><span data-contrast=\"none\">?<\/span><\/b><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:257}\">\u00a0<\/span><\/p>\n<p><b><span data-contrast=\"auto\">Firstly,<\/span><\/b><span data-contrast=\"auto\">\u00a0RBI need might face a\u00a0<\/span><b><span data-contrast=\"auto\">dilemma of managing Inflation and support to economic recovery<\/span><\/b><span data-contrast=\"auto\">.\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:257}\">\u00a0<\/span><\/p>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li data-leveltext=\"\u00b7\" data-font=\"Symbol\" data-listid=\"8\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Inflation is above the RBI\u2019s target band for the past several months and is expected to remain above target for the next several months.\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\u00b7\" data-font=\"Symbol\" data-listid=\"8\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">Whereas, MPC is not able to decide against the expansionary monetary policy, out of concerns for growth and financial stability. <\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\u00b7\" data-font=\"Symbol\" data-listid=\"8\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><span data-contrast=\"auto\">MPC expects inflation to soften by itself due to bumper winter crop and\u00a0normalisation\u00a0of supply chain post-lockdown.\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}\">\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><b><span data-contrast=\"auto\">Second,<\/span><\/b><span data-contrast=\"auto\"> RBI needs to think about the\u00a0<\/span><b><span data-contrast=\"auto\">savers, offered low-interest rates at a time of high inflation.<\/span><\/b><span data-contrast=\"auto\"> Thus, the value of their saving is getting reduced.\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:257}\">\u00a0<\/span><\/p>\n<p><b><span data-contrast=\"auto\">Third,<\/span><\/b><span data-contrast=\"auto\">\u00a0RBI require to withdraw the \u2018excess\u2019 liquidity from the market.\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:257}\">\u00a0<\/span><\/p>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li data-leveltext=\"\u00b7\" data-font=\"Symbol\" data-listid=\"9\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Banks are routinely depositing trillions of rupees with the RBI is evidence that the liquidity increase by RBI is not giving the intended results.\u00a0 <\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\u00b7\" data-font=\"Symbol\" data-listid=\"9\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">Mispricing of risk of too much liquidity for too long can lead to the financial crisis. <\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}\">\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><b><span data-contrast=\"auto\">Fourth,\u00a0<\/span><\/b><span data-contrast=\"auto\">RBI might face the challenge of\u00a0<\/span><b><span data-contrast=\"auto\">\u2018taper tantrums\u2019<\/span><\/b><span data-contrast=\"auto\">\u00a0at the later stage, which triggers the panic sell-off by the investors in the market.\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:257}\">\u00a0<\/span><\/p>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li data-leveltext=\"\u00b7\" data-font=\"Symbol\" data-listid=\"10\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><b><span data-contrast=\"auto\">Taper tantrum:<\/span><\/b><span data-contrast=\"auto\">\u00a0In May 2013, U.S. Federal Reserve Chairmen announced that they were considering gradually tapering\/reducing \u2018quantitative easing\u2019.\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\u00b7\" data-font=\"Symbol\" data-listid=\"10\" aria-setsize=\"-1\" data-aria-posinset=\"4\" data-aria-level=\"1\"><b><span data-contrast=\"auto\">Although the announcement should have been taken as signs of a robust recovery in the economy, instead panic sell-off started in the financial market.\u00a0<\/span><\/b><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}\">\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\u00b7\" data-font=\"Symbol\" data-listid=\"10\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Thus, RBI also need to frame their communication strategy in a way that it doesn\u2019t trigger the panic sell-off.\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><b><span data-contrast=\"auto\">Fifth,<\/span><\/b><span data-contrast=\"auto\">\u00a0RBI will have to\u00a0<\/span><b><span data-contrast=\"auto\">stop the rupee from appreciating<\/span><\/b><span data-contrast=\"auto\">, in the face of policy change.\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:257}\">\u00a0<\/span><\/p>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li data-leveltext=\"\u00b7\" data-font=\"Symbol\" data-listid=\"11\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">Current Account Surplus this year together with massive capital flows has caused increase in flow of dollar in the system.\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\u00b7\" data-font=\"Symbol\" data-listid=\"11\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><span data-contrast=\"auto\">It is putting the upward pressure on the Rupee, which is already overvalued in the real terms.\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}\">\u00a0<\/span><\/li>\n<li data-leveltext=\"\u00b7\" data-font=\"Symbol\" data-listid=\"11\" aria-setsize=\"-1\" data-aria-posinset=\"4\" data-aria-level=\"1\"><span data-contrast=\"auto\">RBI has already absorbed this year, nearly $90 billion to prevent exchange rate appreciation and to maintain the competitiveness of the rupee.\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}\">\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li data-leveltext=\"\u00b7\" data-font=\"Symbol\" data-listid=\"11\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Thus, RBI\u2019s ability to keep the Rupee value in control will be constrained by increasing inflation.\u00a0<\/span><span data-ccp-props=\"{&quot;134233279&quot;:true,&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}\">\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><span data-contrast=\"auto\">In the upcoming days, managing the impossible trinity will be a tricky challenge for RBI given the condition of the economy after COVID-19.<\/span><\/p>\n<p><span style=\"font-size: 14pt; color: #ff0000;\">Read Also :<a style=\"color: #ff0000;\" href=\"https:\/\/forumias.com\/blog\/download-question-papers\/\" target=\"_blank\" rel=\"noopener noreferrer\">upsc previous year question paper<\/a><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Synopsis:\u00a0RBI need to exit out of its expansionary policy and manage\u00a0\u2018the impossible trinity\u2019, i.e. Capital inflow, inflation and exchange rate. Source:\u00a0The Hindu\u00a0\u00a0\u00a0 Introduction\u00a0 RBI adopted the extraordinary expansionary policy after Covid-19.\u00a0\u00a0 It reduced policy interest rates aggressively to increase the liquidity in the market. It also provided targeted assistance to especially distressed sectors.\u00a0 But,\u00a0now RBI&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/rbis-expansionary-policy-and-challenge-of-the-impossible-trinity\/\">Continue reading <span class=\"screen-reader-text\">RBI\u2019s expansionary policy and challenge of the impossible trinity<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":76352,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,1351,1310,9],"tags":[1283],"class_list":["post-76349","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-9-pm-daily-articles","category-daily-news","category-daily-news-updates","category-public","tag-eco_1","entry"],"jetpack_featured_media_url":"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2021\/01\/RBIs-expansionary-policy-and-challenge-of-the-impossible-trinity.jpg?fit=1280%2C720&ssl=1","views":{"total":2,"cached_at":"","cached_date":1698847506},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/76349","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=76349"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/76349\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media\/76352"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=76349"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=76349"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=76349"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}