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As we sight springshoots in the economy, the Reserve Bank of India (RBI) in its monetary policy must be planning for a non-disruptive exit out of the easy money regime. Analyze the challenges and the dilemmas that the RBI faces in this regard.

Topic:  Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment;

4. As we sight springshoots in the economy, the Reserve Bank of India (RBI) in its monetary policy must be planning for a non-disruptive exit out of the easy money regime. Analyze the challenges and the dilemmas that the RBI faces in this regard. (250 words)

Reference: The Hindu

Why the question:

The Reserve Bank of India (RBI) embarked on an extraordinary expansionary policy to manage the financial pressures unleashed by COVID-19. It slashed policy interest rates aggressively, flooded the market with an unprecedented amount of liquidity and instituted a slew of measures for targeted assistance to especially distressed sectors. Now it faces consequences and dilemmas arising from those measures.

Key Demand of the question:

Directive:

Analyze – When asked to analyse, you have to examine methodically the structure or nature of the topic by separating it into component parts and present them as a whole in a summary.

Structure of the answer:

Introduction:

Briefly enumerate the steps taken by the central bank in its monetary policy in the wake of Covid-19.

Body:

Reason as to why those steps were needed – in order to put economy back to the growth trajectory (achieve a V shaped recovery), addressing the liquidity crunch, revival of demand, preventing further job losses, etc.

Now analyses the impact of the above measures undertaken by the RBI which poses certain challenges and dilemmas to the central Bank. The dilemma between restraining inflation and supporting the recovery, uneven and unequal recovery between large and small firms, aggravated unemployment problem, low interest rates at a time of high inflation affecting savings, rupee appreciation concerns and withdrawing the ‘excess’ liquidity in good time etc.

Suggest measures that the central bank has to take to address the same in a non-disruptive manner.

Conclusion:

Conclude with a way forward.

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