RBI Economics & Social Issues 2012-13 Paper
Q. 'Monetary policy is not a panacea for India's long term economic challenges'. Discuss. ........10 Marks
https://drive.google.com/file/d/0B65KNDNdGizOQmlxQnRiTnBTUjg/edit?usp=sharing
Answer:
Times of India
After a devastating blowback from the market, government and RBI must stop their crosstalk
Aug 19, 2013, 12.00AM
Statements from different officials have conveyed the impression that India's central bank is not on the same page as the government. This has spread confusion and undermined the efficacy of monetary policy. Signals from monetary policy are most effectively transmitted when communication is clear. Crosstalk doesn't help. Raghuram Rajan will take over as RBI governor against the backdrop of markets going into free fall, whether be of currency or equities. As he chooses his course of action, he will be aware that the government is financially stretched and politically hamstrung by looming general elections.
India's problems with different deficits, fiscal and current account, are well known. What makes things worse is that not only is the US central bank likely to soon begin rolling back its huge monetary stimulus, but it is likely to do so under a new chairman. Global financial markets' perceptions of the new, and as yet unknown, chairman just add to the uncertainty about the manner in which trillions of dollars will move around.
Monetary policy is not a panacea for India's long-term economic challenges. Prosperity can only be brought about by structural changes to make the economy more productive. That is entirely in the hands of governments - at the Centre and in states. Monetary policy can, at best, be a tool to smoothen ups and downs of economic activity in the short run.
In the recent past monetary policy has been largely ineffective. Particularly, actions to defend the rupee have not only yielded disappointing results but also spread confusion about the policy's goals. Responsibility for this does not lie only with the RBI. It rests as well at the door of the government. Given the challenges that lie ahead, government officials must at the very least restrict comment on monetary policy and avoid public display of differences.
Moreover, credibility will come only by letting market forces play out. The cost of restraining them is now prohibitive. Events of the last week are a stark example of the crisis that can be triggered by experiments of curb and control from the socialist era. The response was a devastating blowback from the market. Together, the government and RBI can steer the economy through troubled waters by complementing each other and letting the market work without arbitrary intervention.