[Editorial Analysis] Diminishing options

Mains Paper 3: Economy
Prelims level: RBI’s Monetary Policy
Mains level: RBI’s recent Monetary Policy Committee’s latest benchmark interest rates and its impact on the economy.

Context:

• In the given article the author talks about RBI’s recent Monetary Policy Committee’s latest benchmark interest rates and its impact on the economy.

What’s the issue?

• Monetary Policy Committee left benchmark interest rates unchanged for a sixth meeting and reiterated that it would keep its policy stance accommodative ’as long as necessary to revive and sustain growth on a durable basis.

• RBI’s latest policy statement underscores the diminishing options available to it to address the economic fallout from the health crisis.

• Since its May 2020 decision to cut interest rates by 40 basis points, taking the cumulative reduction in borrowing costs in the wake of the pandemic’s onset to 115 basis points, the MPC has found itself in a bind.
• The second wave of health crisis has crushed all-round demand and consumer confidence.

• RBI’s latest consumer confidence survey shows the Current Situation Index at a new all-time low, with 75% of households perceiving the economic and employment situations as having worsened further, and the future expectations index reflecting overall pessimism.

• It is hard to see the mere availability of low-cost credit helping revive the all-important consumption demand.

The Impact:

• It has been that assumed rural demand will remain buoyant on the back of an expected normal monsoon while noting that widespread infections in rural areas, which likely led to a sequential decline in tractor and two-wheeler sales in April, could undermine future demand.

• RBI is banking on providing a fillip to economic activity is an accelerated pace of vaccinations, over which it has virtually no control.

• RBI has used the bank’s liquidity spigot as a tool to address some of the economic distress.

• A series of measures focus on bolstering credit flow to the hardest hit MSME and contact-intensive industrial and services sectors, respectively.

• Still, the MPC can ill-afford to drop the ball on its primary remit — ensuring inflation remains anchored.

Conclusion:

• With international commodity prices, including crude oil, on an upward trajectory and no signs of domestic policy support to check skyrocketing petrol and diesel pump prices, inflation is sure to accelerate, posing a major conundrum to the RBI. Raising rates could risk hurting recovery, and not doing so could heighten inflation.

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Prelims Questions:

Q.1) With reference to the startups, consider the following statements:
1. Funding opportunities to startups have been enhanced through the Fund of Funds Scheme with an overlay of INR 10,000 crore.
2. Recently launched Startup India Seed Fund Scheme (SISFS) is having an outlay of INR 945 crores.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: C

Mains Questions:

Q.1) Highlights the impact of RBI’s recent Monetary Policy Committee’s regarding latest benchmark interest rates.

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