Using monetary policy to kick-start growth

RBI's policy easing bodes well for accelerating economic activity.

- AJAY DUA

Last week's reduction of the repo rate—also called the policy rate—by 50 basis points, along with a cut in the mandatory cash reserve ratio for banks by 100 basis points (or 1%), is being hailed as a landmark move by the Reserve Bank of India. Until now, much like most central banks in the developed world, it had adopted a conservative stance in setting such parameters, prioritizing price stability over the promotion of economic growth. Though by simultaneously signaling that it will henceforth adopt a "neutral" stance—no longer an "accommodative" one that guarantees further rate cuts in upcoming reviews—its latest pronouncements explicitly demonstrate a greater concern for effecting economic growth.

The need to balance growth with inflation management and macroeconomic stability is especially pressing in today's international environment, which is plagued by a host of challenges. Prolonged geopolitical conflicts, the resultant economic uncertainties, and the increasingly inward-looking policies of the United States—which threaten not only the global economy but also its own long-standing economic exceptionalism assiduously built over decades—are all matters of serious concern. Additionally, the growing urgency of climate change adds to this complex landscape. Rightly so, such eventualities seem to have impacted the decisions of the Monetary Policy Committee, charged with setting the central bank's policy rates and making other related weighty decisions.