What is the issue?
- Many unconventional measures are being taken to tackle the impact of ongoing Covid-led lockdown on the economy.
- However, these measures are to be taken without undermining the institutional frameworks.
What are the projections?
- Many economists are expecting the Indian economy to contract in the current fiscal year.
- These projections may worsen as it is still not clear when normalcy would be restored.
What are the measures taken?
- The Indian government has announced only a Rs 1.7-trillion package for the most vulnerable section of the population.
- The Reserve Bank of India (RBI) is doing the most of the heavy lifting.
- The RBI has reduced interest rates.
- It reduced the reverse repo rate outside the Monetary Policy Committee (MPC) cycle.
- The RBI has flooded the banking system with liquidity.
- Currently, the system has an excess liquidity worth about Rs.7 trillion.
- Some of the recent policy decisions of the RBI may end up creating longer-term risks.
Did increasing the liquidity help?
- The excess liquidity has not eased pressure in the financial system to the extent desired.
- Even when the MPC decided to keep the policy rate unchanged, the RBI increased liquidity in the system.
- Liquidity was increased to influence medium-term market rates.
- If the market rates are to be brought down, it should be through building a consensus in the MPC to cut policy rates with proper explanation.
What is the current situation?
- With so much liquidity in the system, market rates are now controlled by the RBI and not by the MPC.
- Undermining the MPC can increase financial stability risks, especially in uncertain times.
What could be done?
- In the given economic environment, the policymakers would need to take some extraordinary and unconventional measures.
- But it will also be critical to protect the credibility of institutions.
- If the markets believe that institutional structures and checks are not being undermined, the financial stability could be maintained.
Source: Business Standard
Quick Facts
Monetary Policy Committee (MPC)
- The Finance Act, 2016 amended the RBI Act, 1934 to provide for a statutory framework for a Monetary Policy Committee.
- The MPC will maintain price stability, while keeping in mind the objective of growth.
- It would fix the benchmark policy rate (repo rate) required to contain inflation within the specified target level.
- As per the provisions of the RBI Act, out of the six members of MPC,
- Three Members will be from the RBI and
- Three members will be appointed by the Central Government.
- The meetings of the MPC shall be held at least 4 times a year and it shall publish its decisions after each such meeting.
