RBI's predicament

13 DEC,2020 | MEDC


 

As was widely expected, RBI has decided to leave the interest rates unchanged in its latest monetary policy review. With growth gradually recovering, RBI will need to adopt a more dovish policy stance. No doubt, inflation targeting will have to continue, but employment generation will also become a priority. RBI has already done most of the heavy lifting in providing support to our Covid-affected economy, but the fiscal policy backing has not been proportionate. Interest rates have been reduced substantially over time to flood the system with liquidity. However, as economic growth picks up, maintaining surplus excess liquidity for an extended period could jeopardize inflation prospects. India is not yet out of the woods as far as inflation is concerned. RBI needs to study in detail the esoteric dynamics of inflation, including the nature of supply constraints pushing up prices even as output recovers. RBI should not be perceived as willing to overlook inflation risks, as that could affect the credibility of monetary policy.

*Photo Credit: Google

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