RBI's Monetary Policy Dilemma: To Cut Rates or Not Amidst GST Reforms
UPSC Relevance
Prelims: Indian Economy (Monetary Policy - RBI, Monetary Policy Committee (MPC), Repo Rate; Fiscal Policy - GST; Inflation - Consumer Price Index (CPI)).
Mains:
General Studies Paper 3 (Economy): Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment; Government Budgeting; Inflation. The interplay between monetary and fiscal policy is a core GS3 topic.
Key Highlights from the News
The Monetary Policy Committee (MPC) of the Reserve Bank has differing opinions among economists on whether to implement a rate cut or maintain the status quo on interest rates.
Recently, the government's cut in Goods and Services Tax (GST) has contributed to a decrease in inflation. This could be a factor that might prompt the MPC to reduce interest rates.
Arguments against an interest rate cut:
GST concessions themselves will increase demand in the market, so there's no need to further boost demand by reducing interest rates.
The country's GDP growth is better than expected.
Although retail inflation (CPI inflation) is currently low, it is likely to increase in the future.
Therefore, agencies like ICRA view this as a "close call" and believe that the MPC is unlikely to change interest rates.
The MPC has a dual objective: to control inflation and to support economic growth. The MPC will make a decision that balances these two objectives.
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