April 2017 Monetary policy review, Pradhan Mantri Fasal Bima Yojana: Assessment Current Affairs – 7th April, 2017

April 2017 Monetary policy review, Pradhan Mantri Fasal Bima Yojana: Assessment Current Affairs – 7th April, 2017

April 2017 Monetary policy review

Introduction

Monetary policy is a crucial economic policy tool for the economy. It controls credit flow and hence regulates growth. Inflation targeting is the main idea of the policy with the new Monetary Policy Framework agreement signed. The first monetary policy statement in the new financial year has important signals for the government.

About the new Monetary Policy Agreement:

  • Monetary Policy Framework Agreement is an agreement reached between Government and the central bank in India – The Reserve Bank of India (RBI) – on the maximum tolerable inflation rate that RBI should target to achieve price stability.
  • The Reserve Bank of India and Government of India signed the Monetary Policy Framework Agreement on 20 February 2015 which made inflation targeting and achieving price stability the responsibilities of RBI. Subsequently, the government, while unveiling the Union Budget for 2016-17 in the Parliament, proposed to amend the Reserve Bank of India (RBI) Act, 1934 for giving a statutory backing to the aforementioned Monetary Policy Framework Agreement and for setting up a Monetary Policy Committee (MPC)
  • As per the agreement, RBI would set the policy interest rates and would aim to bring inflation below 6 per cent by January 2016 and within 4 per cent with a band of (+/-) 2 per cent for 2016-17 and all subsequent years.  Hence the second statement goes wrong.

Issue:

Following its decision to shift from an accommodative to a neutral monetary policy stance in February no change in policy stance was expected from the RBI.

  • The Monetary Policy Committee chaired by Reserve Bank of India Governor Urjit Patel has, in fact, decided to raise the rate at which the central bank borrows funds from banks (the reverse repo rate) by 25 basis points, from 5.75% to 6%, while leaving other policy rates untouched.
  • This marginal change is aimed at sucking out from the system excess liquidity that remains a lingering concern, despite coming off its peak in the aftermath of the demonetisation exercise.

Inflation targeting and concerns:

  • The RBI has also proposed a new liquidity management tool (SDF) that awaits government approval, making the draining of surplus liquidity a critical priority all through this year.
    • The central bank also promised to have a more effective liquidity management tool in a new instrument called a standing deposit facility (SDF) at the earliest.
    • The efficacy of the RBI’s liquidity management toolkit will impinge on another key concern: inflation, which is expected to climb to 5% by the second half of this fiscal.
    • The RBI says achieving the stated target of 4% inflation even next year could be challenging, with no disinflationary expected, such as benign commodity and oil prices.
    • It has also pointed to a one-time upside risk to inflation with the implementation of the Goods and Services Tax.

RBI and Growth concerns:

  • The RBI is quite optimistic about an uptick in the economy this year, projecting 7.4% growth in Gross Value-Added, compared to 6.7% in 2016-17.
  • Along with improved prospects for the world economy a rebound in discretionary consumer spending at home is likely, in line with the “pace of remonetisation” and investment demand on account of lowered interest rates.
  • The Governor RBI has raised 4 key issues:
  • First, the need to urgently resolve the surge of bad loans on bank books, for which the RBI will unveil a new Prompt Corrective Action framework by the middle of this month. Without this, a virtuous cycle of healthy credit growth necessary for investment and job creation will remain elusive.
  • Second, the RBI has reminded the government there will be “clearly more demand for capital” in the coming days. The government’s allocation of Rs.10,000 crore to recapitalise public sector banks is obviously inadequate.
  • Third, while banks have reduced lending rates, the RBI has pointed out there is room for more cuts if rates on small savings schemes are corrected.
  • Most important, the government must not ignore Mr Patel’s categorical call to eschew loan waivers of the kind just announced in Uttar Pradesh. This, he warned, would crowd out private investments and dent the nation’s balance sheet.

Conclusion:

Share this post