Monetary gear shifts pose challenges – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/monetary-gear-shifts-pose-challenges/articleshow/87544250.cmsSynopsis

The RBI must accommodate the requirements of growth, while using its sizeable reserves of foreign exchange and control of cross-border capital flows to keep rate changes smooth. The RBI must weigh the export gains of rupee depreciation against the risk of imported inflation.

The US Fedthe Bank of England and the Reserve Bank of Australia all decided to hold on to ultra-low rates of interest. Bond purchases would be wound down gradually, at pre-announced volumes, avoiding shocks. This is good news for the world economystock markets, in particular. However, to the extent tighter monetary policy in the rich world has a tendency to pull some of the capital sourced from these markets to flow back to them from the emerging markets, there is good reason to guard against any disruptive volatility in currency or interest rates. Macroeconomic and financial stability in a country like India are key, in this context.

Federal Reserve Chairman Jerome Powell has tried to prepare the market for a shift in monetary policy gears well in advance, unlike the taper in 2013. The process involves a $15 billion reduction in monthly bond purchases from the current level of $120 billion. The Fed seeks to ‘achieve inflation moderately above 2% for some time so that inflation averages to 2% over time and longer-term inflation expectations remain well anchored at 2%. It expects to maintain an accommodative stance of monetary policy until these outcomes are achieved.’ This means the rates will stay soft, by historical standards, in much of 2022 as well.

Coordination between the government and the RBI is key. Spending and policy by the government must boost growth, investment, including by foreigners, and widening of the tax base to lower the fiscal deficit. The RBI must accommodate the requirements of growth, while using its sizeable reserves of foreign exchange and control of cross-border capital flows to keep rate changes smooth. The RBI must weigh the export gains of rupee depreciation against the risk of imported inflation.

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