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UPSC MainsGeneral Studies Paper IIIIndian EconomyPractice question

RBI Post-Pandemic Revival and Inflation Control

Enumerate the steps taken by the RBI in the aftermath of Corona crisis to revive Indian economy & control inflation. How far has RBI been able to achieve these objectives? Evaluate.

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Begin by introducing the RBI's counter-cyclical monetary policy response to mitigate the pandemic shock while upholding flexible inflation targeting. Enumerate specific steps across two distinct phases: growth revival via liquidity easing and subsequent inflation containment via policy tightening. Conclude by evaluating the policy outcomes, highlighting achievements such as financial stability and growth rebound alongside limitations like supply-driven inflation breaches.

Model answer

455 words

Introduction

In the aftermath of the COVID-19 pandemic and subsequent global geopolitical shocks, the Reserve Bank of India (RBI) deployed counter-cyclical monetary and regulatory policies. The central bank sought to balance post-pandemic economic revival with its statutory mandate of maintaining price stability within the 4±2% Flexible Inflation Targeting (FIT) framework.

Steps Taken by the RBI

The RBI's policy measures evolved across two main phases: an accommodative phase focused on reviving economic growth and financial liquidity, followed by a calibrated tightening phase to curb inflation.

  • Growth Revival and Liquidity Easing (2020–2021): Slashed the policy repo rate by 115 basis points to a historic low of 4.0% and reduced the Cash Reserve Ratio (CRR) by 100 basis points to lower borrowing costs.
  • Unconventional Liquidity Measures: Deployed targeted instruments including Targeted Long-Term Repo Operations (TLTRO), the Government Securities Acquisition Programme (G-SAP), and Special Liquidity Facilities to ensure credit flow to stressed sectors.
  • Regulatory Relief and Debt Restructuring: Granted a six-month loan moratorium and instituted Resolution Frameworks 1.0 and 2.0 to facilitate debt restructuring without triggering immediate asset classification downgrades.
  • Calibrated Tightening and Normalisation (2022 Onwards): Cumulatively hiked the repo rate by 250 basis points to 6.50% under a 'withdrawal of accommodation' stance to curb imported and core inflation.
  • Liquidity Absorption: Operationalised the uncollateralised Standing Deposit Facility (SDF) at 6.25% as the floor of the liquidity corridor and deployed a temporary Incremental Cash Reserve Ratio (I-CRR) to drain surplus liquidity.

Evaluation of RBI’s Policy Outcomes

The RBI's dual mandate faced severe external and domestic headwinds, leading to tangible successes alongside notable structural limitations.

  • Robust Growth Rebound: Facilitated a sharp economic revival, enabling Indian real GDP to expand by 8.2% in FY24, making it one of the fastest-growing major economies globally.
  • Preserved Financial Stability: Preventive restructuring and targeted liquidity prevented a balance-sheet crisis; Gross Non-Performing Assets (GNPAs) of scheduled commercial banks declined to a 12-year low of 2.8% in March 2024.
  • Core Disinflation: Successfully anchored inflationary expectations, bringing core Consumer Price Index (CPI) inflation below 3.5% and preventing secondary price spirals.
  • Inflation Target Breaches: Headline retail inflation breached the upper tolerance ceiling of 6% for three consecutive quarters in 2022, necessitating a statutory explanatory report to the Central Government under Section 45ZN of the RBI Act.
  • Inelasticity to Food Shocks: Monetary tools proved ineffective against volatile, climate-induced spikes in food components, which continuously elevated headline numbers.
  • Impact on MSME Borrowers: Tightening increased lending rates by approximately 190 basis points, raising debt-servicing burdens and moderating credit demand for small enterprises.

Conclusion

The RBI successfully orchestrated a macroeconomic 'soft landing' by safeguarding financial sector resilience while anchoring medium-term growth. However, achieving durable price stability in the face of recurrent climate and geopolitical supply-side disruptions necessitates proactive fiscal and administrative supply-side interventions alongside monetary prudence.

Key facts to remember

statistic

Scheduled commercial banks' Gross Non-Performing Assets fell to a 12-year low of 2.8% in March 2024.

— Reserve Bank of India Financial Stability Report
statistic

India's real GDP grew by 8.2% in FY24, highlighting a robust post-pandemic growth rebound.

— National Statistical Office (NSO)
scheme
Section 45ZN of the RBI Act, 1934

Mandates that if the RBI fails to meet the inflation target for three consecutive quarters, it must submit a report to the Central Government explaining the failure, remedial actions, and estimated time to achieve the target.

Frequently asked questions

What is the Standing Deposit Facility (SDF)?

Introduced by the RBI in 2022, the Standing Deposit Facility allows the central bank to absorb surplus liquidity from commercial banks without providing government securities as collateral, strengthening liquidity management.

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