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The monetary policy needs to maintain a balance between economic growth and high inflation. Why has the central bank kept the interest rates low? What is its impact? Examine the factors for the increasing rate of inflation in the economy and suggest steps that are needed to balance it.

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

5. The monetary policy needs to maintain a balance between economic growth and high inflation. Why has the central bank kept the interest rates low? What is its impact? Examine the factors for the increasing rate of inflation in the economy and suggest steps that are needed to balance it. (250 words)

Difficulty level: Moderate

Reference: The HinduNew Indian Express

Why the question:

India’s inflation based on the consumer price index quickened to 6.01% in January, breaching the central bank’s upper tolerance limit of 6%. While the headline number was no surprise given that the RBI had forecast the acceleration, the official data merit scrutiny.

Key Demand of the question:

To write about the adverse effects of climate change on the planet.

Elucidate – Give a detailed account as to how and why it occurred, or what is the context. You must be defining key terms wherever appropriate and substantiate with relevant associated facts.

Structure of the answer:

Introduction: 

Begin by developing a link a between inflation and economic growth and how central bank is tasked with balancing it.

Body:

First, mention the reasons for low interest rates by the RBI – spurring growth, overcoming impact of the pandemic, higher demand by consumers and investments by corporations, leading to higher GDP growth and job creation.

Next, write about the impact of keeping the policy rate low – increasing inflation, lack of monetary policy transmission, increased inequality etc.

Next, mention the reasons for increasing trends in inflation and suggest steps to overcome the same.

Conclusion:

Conclude by writing a way forward.