With Rising inflation and deceleration of the economy, Reserve Bank of India (RBI) in its fifth monetary policy has kept the repo rate unchanged . How does it fare for the economy and what measures can be adopted to boost the economy ?

The RBI’s fifth monetary policy statement sees the repo rate unchanged at 5.15%. All six members of the MPC, unanimously voted in favour of maintaining the status quo and not cutting the repo rate.

The RBI has cut the repo rate by 135 points in 2019, to a nine-year low of 5.15%. 

The challenge before the RBI is to maintain the retail inflation based on CPI at 4% level while ensuring the overall growth of the economy. Retail inflation and economic growth tends to rise and fall at the same time, as higher growth results in higher demand for goods. However, in the present scenario economic growth has decelerated sharply while inflation has gone up. 

Retail inflation breached RBI’s target level of 4% to rise to a 16-month high in October even as India’s GDP growth decelerated for the sixth consecutive quarter to just 4.5% in Q2 (July to September). So the challenge is to balance between growth while controlling inflation. 

RBI’s forecast for growth and inflation – 

The RBI has toned down the economic growth forecast for the current financial year to 5%. The rapid deceleration can be gauged by cut in the growth forecast for the current financial to 5% from 7%.  

The economic growth is likely to stay below 6% till September 2020.

On inflation, the numbers have consistently gone up. From a retail inflation forecast of just 3.6% in the second half of the current financial year, the RBI has now raised the forecast to as high as 5.1%.

However, in the first quarter of the next financial year, that is April to June, inflation is expected to moderate.

Way ahead – 

According to experts, quantitative easing may help the India economy. It will help to lower the long term government bond yield. Thus, it will reduce loan costs for risky borrowers as government bond yields act as a benchmark. Secondly, a banking system with more low yielding cash will be willing to lend. 

RBI can also follow the footsteps of the US Federal Reserve, which bought government bonds from nonbanks including hedge funds, broker-dealers and insurance companies.

Since nonbank sellers of bonds don’t have accounts with the Central bank, they can deposit can with any commercial lenders. The money supply would accelerate even without new loans being given out.