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Inflation Targeting should be as Framework, Not Policy Rule

In preparing the second bimonthly policy statement for this fiscal, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) needs to view inflation targeting more as a framework than as a policy rule. The MPC needs to indicate easier cost of funds so as to improve sentiments, shore up demand and boost the faltering growth momentum going forward.
If seen as a rigid policy rule, there seems a solid case for the RBI to hold headline rates steady. As its Monetary Policy Report for April mentioned, while headline inflation did fall to a historic low, it is ‘not broad-based’ yet. The report added that the persistence of inflation, excluding food and fuel, poses a challenge to the inflation outlook. Further, it stated that there is considerable uncertainty as to how prices will pan out over the coming months. The report was sanguine that the recent appreciation of the rupee has had a ‘soothing’ impact on domestic inflation.
But the fact of the matter is that it is arbitrage opportunities and high relative interest rates that are artificially attracting foreign funds to Indian shores.
Given that the trend in capital formation (read: investment, especially corporate investment) has been weak for years, the hardening rupee is not due to improved fundamentals and productivity gains. Keeping policy rates unchanged will merely aggravate inflows. Instead, taking into account the ground reality of decelerating GDP growth in the January-March 2017 quarter and weakening capital formation, it would make better sense for the MPC to consider inflation targeting as a flexible framework and purposefully indicate lower policy rates.
Yes, the continuing problem of unresolved non-performing assets (NPAs) in the banking sector is a drag on credit offtake, and weakens the transmission mechanism for monetary policy initiatives and revised interest rates. However, in a regime of declining inflation, high and rising real rates of interest are wholly avoidable — especially with margins under pressure and a sharp decline in profit growth. So, ease policy rates, RBI. Source: Economic Times

IMPORTANT WORDS FROM ARTICLE & THEIR MEANING

1) Faltering (हीनता) - Flat-er-ing
Meaning - lose strength or momentum - Verb
speak hesitantly - Verb
Synonyms - hesitate, fluctuate
Antonyms - calm, hold
Example - The economy is showing signs of faltering.

2) Persistence (हठ) - Per-sis-tense
Meaning - the fact of continuing in an opinion or course of action in spite of difficulty or opposition - Noun
Synonyms - tenacity, endurance
Antonyms - apathy, lethargy
Example - Her persistence paid off when she was offered the job of manager.

3) Inflation (मुद्रास्फीति) - Har-bour-ing
Meaning - the action of inflating something or the condition of being inflated - Noun
Synonyms - boom, expansion
Antonyms - abridgment, compression
Example - The prime aim is to keep inflation down.

4) Sanguine (आशावादी) - Sang-uin
Meaning - optimistic or positive, especially in an apparently bad or difficult situation - Adjective
Synonyms - optimistic, bullish
Antonyms - depressed, gloomy
Example - He seemed quite sanguine about his chances of success.

5) Arbitrage (पंचायत) - Ar-bi-tr-age
Meaning - the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset - Noun
buy and sell assets using arbitrage - Verb
Synonyms - investment, merchandise
Example - As well as searching for arbitrage opportunities, computers can also be used to initiate programme trades.

6) Decelerating (मंद) - De-cel-rate-ing
Meaning - reduce or cause to reduce in speed - Verb
Synonyms - brake, slow
Antonyms - accelerate
Example - This price rise occurred in the context of restrictive policies, rapidly decelerating output and double-digit inflation.

7) Regime (शासन) - Reg-ime
Meaning - a government, especially an authoritarian one - Noun
Synonyms - dominion, government
Antonyms - enlarge, extend
Example - The military regime has promised to restore democracy soon.

8) Searing (दिलों को भेदने) - Sear-ing
Meaning - extremely hot or intense - Adjective
Synonyms - scorching, blistering
Antonyms - freezing, cold
Example (English) - Searing hot loo winds turned Delhi-NCR into a furnace.
Example (Hindi) - बहुत तेज़ गर्म लू हवाओँ ने दिल्ली-एनसीआर को भट्ठी में बदल दिया।

Now considering the article above as a Reading Comprehension question, try to answer the following -
  • Why are inflation and deflation considered to be economic problems?
  • Assess the effectiveness of monetary policy in controlling inflation.
Given below are some words to check your vocabulary you can make sentences with those words in the comment section which will be reviewed by us.
  • Momentum
  • Sentiments
  • Soothing
  • Aggravate
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