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Growth over inflation: On economic expansion over inflation control
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Context
The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) has reduced the benchmark repo rate from 6.50% to 6.25% for the first time in five years, signaling a shift in the central bank's approach amid concerns over economic growth. Despite inflation remaining above the RBI’s target, the move aims to support a struggling economy in light of lower growth projections.
Inflation and Growth Trade-off:
- Inflation Moderation: Inflation has moderated to 5.2% in December, but remains above the RBI’s 4% target, necessitating a delicate balancing act between inflation control and stimulating growth.
- Weak Economic Growth: GDP growth projections for 2024-25 have slipped to a four-year low of 6.4%, signaling a slowing economy and highlighting the need for growth-supportive measures.
- Global Economic Uncertainty: Global challenges such as a stronger dollar, stalled disinflation, and uncertain rate cuts in the U.S. are further complicating India’s monetary policy decision-making.
Monetary Policy Adjustments and Forecasts:
- Rate Cut Justification: The MPC decided to cut rates despite ongoing inflationary concerns, anticipating further price moderation, with inflation expected to average 4.2% in 2025-26.
- Policy Alignment with Fiscal Measures: The RBI’s post-Budget stance indicates closer coordination with the government's fiscal policy to achieve a balanced economic response.
- Expectation of Food Inflation Stabilization: The outlook relies on favorable food inflation conditions, including a normal monsoon and a bumper harvest of key vegetables like tomato, onion, and potato.
Future Considerations for MPC:
- Review Schedule Adjustments: With inflation potentially cooling further, the MPC might benefit from adjusting its bi-monthly review schedule to incorporate the latest inflation data.
- Governor’s Influence: The RBI's new Governor, along with an upcoming Deputy Governor appointment, may lead to changes in how the MPC adjusts monetary policy based on evolving data.
- Importance of Data-Driven Policy: A more responsive approach to monetary policy will enhance the RBI’s ability to make timely and informed decisions in response to real-time economic indicators.
Practice Question:
Q: Discuss the role of the Reserve Bank of India’s Monetary Policy Committee in balancing inflation control and economic growth. How does the current economic scenario affect the RBI’s policy stance? (250 words)
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