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Slowdown effects more pronounced in India: IMF GS:3 Economy :EMPOWER IAS

Slowdown effects more pronounced in India: IMF

 

 

In news:

  • The RBI  recently lowered India’s GDP growth estimate for the year to 6.1% from the earlier 6.9% due to the ongoing period of economic slowdown.

 

 

RBI rate reduction:

  • RBI has reduced the repo rate for the fifth consecutive time this year
  • The Monetary Policy Committee (MPC) of the apex bank also cuts GDP growth forecast for the current fiscal year 2019-20 to 6.1% from 6.9% earlier.

 

 

Important points:

 

  • International Monetary Fund (IMF) chief Kristalina Georgieva said warned that the global economy is witnessing “synchronised slowdown” which will result in slower growth for 90% of the world this year
  • Despite this overall deceleration, close to 40 emerging market and developing economies are forecast to have real GDP growth rates above 5% — including 19 in sub-Saharan Africa, the IMF chief said. In the U.S. and Germany, unemployment is at historic lows. 
  • Yet, across advanced economies including the U.S., Japan and especially the Euro area, there was a softening of economic activity.
  • In some of the largest emerging market economies, such as India and Brazil, the slowdown is even more pronounced. In China, growth is gradually coming down from the rapid pace it saw for many years.”

Slowdown effects more pronounced in India: IMF

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RBI monetary policy announcement:

  • RBI governor said there is no reason to doubt the government's commitment to maintain the fiscal deficit numbers as given in the budget
  • A repo rate cut allows banks to reduce interest rates for consumers and lowers equal monthly instalments on home loans, car loans and personal loans.
  • Central banks around the world are loosening monetary policy to offset a global slowdown made worse by U.S.-China trade tensions
  • The rupee pared its early morning gains and was trading marginally down by 2 paise at 70.89 against the American currency, after the Reserve Bank of India cut its repo rate.
  • RBI will take a fresh look at cooperative bank regulations and take it up with the government: Shaktikanta Das.
  • The RBI has allowed domestic banks to freely offer foreign exchange (forex) prices to NRIs at all times, out of their Indian books, either by a domestic sales team or through their overseas branches.
  • The RBI has said that the continuing slowdown warrants intensified efforts to restore the growth momentum.
  • RBI said monetary transmission has remained "staggered and incomplete". As against the cumulative policy repo rate reduction of 110 bps during February-August 2019, the weighted average lending rate (WALR) on fresh rupee loans of commercial banks declined by 29 bps.

 

Way ahead:

  • Structural Reforms Needed: Experts right reforms in the right sequence could double the speed at which emerging markets and developing economies reach the living standards of the advanced economies
  •  fully implementing the financial regulatory reform agenda, to fighting money laundering and the financing of terroris
  • one of the priorities was to assist countries as they reduce carbon emissions and become more climate resilient
  • Limiting global warming to a safe level requires a significantly higher carbon price.
  • Economists said the slowdown is cyclical but deep-rooted and some structural reforwill be needed to ensure that growth gets back on track.


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Monetary policy:

  • The monetary policy refers to a regulatory policy whereby the central bank maintains its control over the supply of money to achieve the general economic goals. Main instruments of the monetary policy are: Cash Reserve Ratio, Statutory Liquidity Ratio, Bank Rate, Repo Rate, Reverse Repo Rate, and Open Market Operations.
  • The Chakravarty committee has emphasized that price stability, growth, equity, social justice, promoting and nurturing the new monetary and financial institutions have been important objectives of the monetary policy in India.

 

Instruments of Monetary Policy

The instruments of monetary policy are of two types:

1. Quantitative, general or indirect (CRR, SLR, Open Market Operations, Bank Rate, Repo Rate, Reverse Repo Rate)

2. Qualitative, selective or direct (change in the margin money, direct action, moral suasion)

These both methods affect the level of aggregate demand through the supply of money, cost of money and availability of credit. Of the two types of instruments, the first category includes bank rate variations, open market operations and changing reserve requirements (cash reserve ratio, statutory reserve ratio).

 

Objectives of the Monetary Policy of India

    • Price Stability: Price Stability implies promoting economic development with considerable emphasis on price stability. The centre of focus is to facilitate the environment which is favourable to the architecture that enables the developmental projects to run swiftly while also maintaining reasonable price stability.
    • Controlled Expansion Of Bank Credit: One of the important functions of RBI is the controlled expansion of bank credit and money supply with special attention to seasonal requirement for credit without affecting the output.
    • Promotion of Fixed Investment: The aim here is to increase the productivity of investment by restraining non essential fixed investment.
    • Restriction of Inventories: Overfilling of stocks and products becoming outdated due to excess of stock often results is sickness of the unit. To avoid this problem the central monetary authority carries out this essential function of restricting the inventories. The main objective of this policy is to avoid over-stocking and idle money in the organization
    • Promotion of Exports and Food Procurement Operations: Monetary policy pays special attention in order to boost exports and facilitate the trade. It is an independent objective of monetary policy.
    • Desired Distribution of Credit: Monetary authority has control over the decisions regarding the allocation of credit to priority sector and small borrowers. This policy decides over the specified percentage of credit that is to be allocated to priority sector and small borrowers.
    • Equitable Distribution of Credit: The policy of Reserve Bank aims equitable distribution to all sectors of the economy and all social and economic class of people
    • To Promote Efficiency: It is another essential aspect where the central banks pay a lot of attention. It tries to increase the efficiency in the financial system and tries to incorporate structural changes such as deregulating interest rates, ease operational constraints in the credit delivery system, to introduce new money market instruments etc.
    • Reducing the Rigidity: RBI tries to bring about the flexibilities in the operations which provide a considerable autonomy. It encourages more competitive environment and diversification. It maintains its control over financial system whenever and wherever necessary to maintain the discipline and prudence in operations of the financial system.

 

 

 

Additional Information:

International Monetary Fund (IMF)

  • The International Monetary Fund (IMF) is an organization of 189 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
  • Created in 1945, the IMF is governed by and accountable to the 189 countries that make up its near-global membership.
  • The IMF's primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other. The Fund's mandate was updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability.

Repo rate:

 It is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.

Reverse repo rate:

 It is the rate at which the central bank of a country (Reserve Bank of India in case of India) borrows money from commercial banks within the country. It is a monetary policy instrument which can be used to control the money supply in the country.

 

 

 

Source)

https://www.thehindu.com/business/Economy/effects-of-global-synchronized-slowdown-more-pronounced-in-india-imf-chief/article29624904.ece

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