What is the issue?
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is planning for a cut in the interest rates.
What is Monetary policy committee?
- The Finance Act 2016, provide a statutory and institutionalised Monetary Policy Committee for maintaining price stability.
- The MPC has the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.
- There are six Members of Monetary Policy Committee, three Members will be from the RBI.
- The other three Members of MPC will be appointed by the Central Government.
What are importance of interest rates?
- A change in the interest rate has consequences for the exchange rate, which has effects on inflation, investment and growth.
- India’s “import-oriented” growth strategy is based on availability of foreign finance.
- The interest rate has a greater importance in sustaining inflows of foreign finance.
What is the present need for rate cut?
- The core inflation and inflationary expectations are high.
- A lower interest rate is expected to revive investment or increase capacity utilisation.
- Companies are debt-laden and banks are burdened with non-performing assets.
What will be consequences of reduced interest rates?
- The inflow of foreign finance is most likely to decline, this may result in a serious depreciation of the rupee.
- This would threaten to increase inflation, bring insolvency to companies that have borrowed in foreign currency.
- There will be negative impact on manufacturing.
- There are chances of economic slowdown.
How the issues can be addressed?
- A transition from foreign finance-led growth to growth driven by both exports and domestic demand is required.
- The policy focus on achieving current account surplus is needed.
- Import-dependence of manufacturing sectors need to be curbed.
- Growth of domestic demand can be fetched from income growth in agriculture.
Source: Business Standard
