Kick starting the growth - Slash policy rates by RBI would work
Kick starting the growth - Slash policy rates by RBI would work
We are currently in the period where inflation is high; prizes for all the commodities have increased. In this time what should be the policy of Reserve Bank of India, should they slash the policy rates or increase it?
For:
- RBI kept the indicative policy rates and Cash reserve ratio unchanged at 7.25% and 4% respectively to suppress unpredictability in the foreign exchange market which is at jeopardy to inflation
- Because of the excessive instability in the foreign exchange market, the Reserve Bank of India has took recourse of liquidity tightening measure
- The liquidity tightening measure would be trundled back in a regulated mode as permanency is reinstated in the foreign exchange market, hence empowering the monetary policy to relapse to auxiliary growth with enduring vigil on inflation
- If the interest rates are dropped down further, then it would help in cutting down the project cost hence encouraging the emergence of new entrepreneurs which would help in the inchoate recovery.
Against:
- The central bank is currently undergoing an upward current account deficit leading to a 5.6% depreciation of the rupee in the current financial year, which is a major concern for the central bank at the moment
- The increment in the current account deficit can have an inflationary sway on imported artefact prizes, and mainly on the raw materials and oil products, leading to a second round of inflation
- Reducing the policy rates would also lead to reduction in the capital inflows and elicit a further depreciation in rupee
- Government incapability to cut red tape, fine – tuning policy, easing supply bottlenecks have muted RBI’s efforts all the more.
Conclusion:
- Slashing down the policy rates will definitely help in reviving with the current inflation, but more than that the government and the central bank should work in coalition with each other to have a much more effective result and hence improving the current financial condition of India.
