Context:

• The slowing of the economy suggests that the central bank’s stance on inflation may have impacted growth

Recent measures taken by MPC:

• The Reserve Bank of India (RBI) cut the repo rate or key lending rate by 25 basis points while maintaining an accommodative stance. 
• The reverse repo rate was reduced to 4.9%.
• The Monetary Policy Committee (MPC) also cuts GDP growth forecast for the current fiscal year 2019-20 to 6.1% from 6.9% earlier.
• A repo rate cut allows banks to reduce interest rates for consumers and lowers equal monthly instalments on home loans, car loans and personal loans.
• Central banks around the world are loosening monetary policy to offset a global slowdown made worse by U.S.-China trade tensions
• RBI will take a fresh look at cooperative bank regulations and take it up with the government
• The RBI has allowed domestic banks to freely offer foreign exchange (forex) prices to NRIs
• The continuing slowdown warrants intensified efforts to restore the growth momentum.
• On the crisis in the Punjab & Maharashtra Cooperative Bank (PMC), the RBI governor said one incident cannot be and should not be used to generalise the health of the co-operative banking sector.
• PCA (Prompt Corrective Action) is an opportunity for the bank to correct itself.
• Appealed members of the public and all depositors that our banking system remains sound and stable, there is no reason for unnecessary panic.

• RBI has decided to create a separate category of NBFC, viz., Non-Banking Financial Company-Micro Finance Institution (NBFC-MFI).

• It acknowledged “the negative output gap has widened further”

Negative output gap:

• A negative output gap indicates surplus capacity in the economy. A widening of this gap means the industry is unable to use much of its capacity due to poor demand.

What is Prompt Corrective Action?

• To ensure that banks don’t go bust, RBI has put in place some trigger points to assess, monitor, control and take corrective actions on banks which are weak and troubled. 

• The process or mechanism under which such actions are taken is known as Prompt Corrective Action, or PCA.

Present scenario:

• Inflation is well within the target giving space to the RBI to focus on growth

• Crude oil prices are back in the comfort zone, retreating from the spike in mid-September, and food prices are projected to remain soft on the back of a good monsoon.

Central bank in west:

• Reflects two things: the political power of financial interests in the U.S. economy and the global intellectual influence of the American economic model. 
• This model revolves around the goal of maximum creation of wealth by private individuals unimpeded by societal objectives. 
• No equal distribution
• The objective of ensuring stability of the economy is allowed to come in the way of private individuals pursuing wealth enhancement.
• This model requires of the government only one action, namely, the control of inflation.

Inflation:

• Unanticipated inflation is the problem for producers, as it has the potential to derail their profit calculations. 
• If fully anticipated, can harm holders of financial assets yielding fixed incomes by eroding their wealth.
• Borrowers on the other hand are better off with inflation as the real value of their outstanding loans is now less. 
• This can be tackled through inflation-indexation, the practice is not widespread. This leaves owners of financial wealth averse to inflation.

Indexation is a technique to adjust income payments by means of a price index, in order to maintain the purchasing power of the public after inflation, while deindexation is the unwinding of indexation.

Inflation control:

• When inflation control is implemented via monetary policy it results in higher interest rates. 
• Managers of financial wealth lobby for such a policy on behalf of their clients. 
• This lobbying is the origin of the policy of inflation targeting.
•  Inflation targeting by the central bank involves use of the interest rate to keep inflation under control.
•  it let go of the employment objective and central bank is not accountable for unemployment
•  in situations where growth, employment and inflation are jointly determined, inflation-targeting via the interest rate can lower inflation only by suppressing growth 
• This is the mechanism by which inflation-targeting inevitably lowers growth.

Way forward:

• Public regulation, which sets limits to private activity, is rejected as an unnecessary interference in beneficial activity that maximises social gain, and is therefore to be avoided

Conclusion:

• Governments across the world, including in India, spend big money on social schemes without the vaguest of ideas on whether their objectives have been met. 
• The field-work based approach that these economists have perfected has revolutionised the field of development economics and made it more relevant in policy making. 
• The government would do well to borrow from the research of these laureates to understand the impact of its several schemes, and where necessary, tweak them to derive maximum benefit for the thousands of crores of rupees that it spends.