RBI's Monetary Policy: The Limits of Rate Cuts and the Role of Fiscal Policy
UPSC Relevance
Prelims: Indian Economy (Monetary Policy, Reserve Bank of India - RBI, Monetary Policy Committee - MPC, Inflation, GDP, Fiscal Policy, GST).
Mains: GS Paper 3 (Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment; Government Budgeting; Inclusive growth and issues arising from it).
Key Highlights from the News
Policy Decision: The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) decided to pause interest rate cuts.
Reasons for the Pause:
Global Uncertainty: Ongoing trade talks with the US and uncertainties related to tariffs persist.
Impact of Policies: The full effect of the 100 bps (1%) interest rate cut implemented since February 2025 will take time to reflect in the economy. This is known as monetary policy transmission.
Weak Demand: Despite interest rate cuts and sufficient liquidity in banks, there is a significant decline in borrowing. This indicates weak demand in the economy.
Decline in Loan Growth: The growth rates of consumer durables, housing loans, vehicle loans, and loans to industry have all decreased.
Solution: Monetary policy alone, such as interest rate cuts, is not sufficient for economic growth. Fiscal policy from the government is essential.
Suggestions: The government should focus on tax measures. Rationalizing Goods and Services Tax (GST) rates and reducing fuel prices are measures that will increase consumer confidence.
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