Context:
- An editorial analysis highlights how persistently low inflation has provided the Reserve Bank of India (RBI) with room to ease monetary policy to support economic growth.
- The move comes amid moderating growth projections, fiscal constraints, and external sector uncertainties, making monetary policy a key stabilisation tool.
Key Highlights:
Growth and Inflation Trends
- India recorded 8.2% GDP growth in Q2, with strong performance across agriculture, manufacturing, and services.
- Retail inflation has remained below RBI’s target band since February.
- Core inflation stood at 2.6% in October, reflecting subdued underlying price pressures.
- RBI projects growth moderation to 7% in Q3 and 6.5% in Q4.
Monetary Policy Decision
- The Monetary Policy Committee (MPC) reduced the repo rate by 25 basis points.
- This followed two consecutive policy pauses, signalling a calibrated shift towards growth support.
- Decision influenced by:
- High real GDP growth
- Low and stable inflation
- Depreciating rupee, affecting external competitiveness
Fiscal and Nominal Growth Constraints
- Nominal GDP growth in the first half stood at 8.8%, below the 10.1% assumption in the Union Budget.
- This limits fiscal headroom, increasing reliance on monetary policy to stimulate demand.
External Sector Concerns
- Goods exports declined in October, indicating global demand weakness.
- External uncertainties pose downside risks to growth, especially through trade and capital flows.
Liquidity and Transmission
- RBI emphasised ensuring adequate liquidity in the banking system.
- Focus on effective transmission of rate cuts to credit markets to support investment and consumption.
Relevant Prelims Points:
- Issue: Balancing growth support with price stability in a low-inflation environment.
- Causes:
- Softening global demand
- Moderate domestic price pressures
- Fiscal constraints
- Government / RBI Initiatives:
- Flexible Inflation Targeting (FIT)
- Liquidity management operations
- Benefits of Rate Cut:
- Cheaper credit
- Boost to consumption and investment
- Support to growth amid global slowdown
- Challenges:
- Weak credit demand transmission
- External shocks and currency volatility
- Impact:
- Short-term growth stimulus
- Reinforcement of counter-cyclical policy stance
Relevant Mains Points:
Facts and Definitions
- Inflation: Sustained rise in general price levels reducing purchasing power.
- Monetary Policy Committee (MPC): Statutory body under RBI responsible for setting policy rates.
- Repo Rate: Rate at which RBI lends to commercial banks.
Conceptual and Static Linkages
- Role of counter-cyclical monetary policy
- Trade-off between growth and inflation
- Monetary policy effectiveness under limited fiscal space
Keywords
- Low inflation, monetary easing, repo rate cut, liquidity support, growth stimulus
Way Forward
- Maintain data-driven and cautious easing to avoid financial instability
- Strengthen credit transmission mechanisms
- Complement monetary policy with structural reforms to boost exports and productivity
- Enhance coordination between fiscal and monetary policy for sustained growth
UPSC Relevance (GS-wise):
- GS 3: Economy – Monetary policy, inflation management, growth dynamics
- GS 2: Governance – Role of RBI, economic policymaking institutions