planning-an-exit-out-of-the-easy-money-regime-summary

Context: The RBI’s main challenge would be in managing the tension between restraining inflation and supporting recovery.

Background:

  • RBI followed expansionary monetary policy to manage the financial pressures caused by COVID-19. 
    • It cut policy interest rates
    • Pumped the market with huge amount of liquidity and 
    • Targeted assistance to especially distressed sectors.

Challenges for RBI: The RBI’s main challenge would be in managing the tension between restraining inflation and supporting recovery.

  • Inflation and revival

    • Inflation can go upwards by several factors. There is the risk that persistent high inflation expectations would result in food inflation
  • Fragile economic recovery: It has also been uneven and unequal, with large industries finding their foothold while small and medium enterprises and the entire informal sector continue to be in distress. 
  • Unemployment: And there is heightened concern about an aggravated unemployment problem caused by big firms retrenching labour to cut costs.
  • Savings: The household savers are hit by low interest rates at a time of high inflation.

  • Withdrawing the ‘excess’ liquidity from the market will be a challenge.. 

  • Market reactions: As the RBI seeks to guard financial stability by normalising liquidity, it will have to contend with possible market reactions. 

    • The third big challenge for the RBI going forward will be to restrain the rupee from appreciating out of line with fundamentals. 
  • Financial stability
  • The RBI’s ability to continue to intervene in the forex market will be constrained by its anxiety about how the resultant liquidity might aggravate inflation and the risk to financial stability. 
  • Managing the impossible trinity will be a tricky challenge for RBI going forward.

Source: https://www.thehindu.com/opinion/lead/planning-an-exit-out-of-the-easy-money-regime/article33545050.ece