W AutoSave (O of ) SET 1, ETQP, EEE, Term II, 2021-23 - Protected View . Saved to this PC 9 Search (Alt+Q) arvind tiwari X File Home Insert Draw Design Layout References Mailings Review View Help Comments Share Government expenditure ( in Revenue and capital account separately) (OMarks) Fiscal deficit (5Marks) Q.3. Read the following excerpts and answer. Minutes of the Monetary Policy Committee Meeting (Source: Minutes of the Monetary Policy Committee Meeting, December 6 to 8, 2021, RBI) The Monetary Policy Committee (MPC) at its meeting today (December 8, 2021) decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4.0 per cent. The reverse repo rate under the LAF remains unchanged at 3.35 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 per cent. The MPC also decided to continue with the accommodationce as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth. Globalisation of inflation and monetary policy making (Source: Times of India, January 9, 2022) The CPI in India in November 2021 was close to 5%, while the core inflation was above 6% and WPI above 14%. Not only in India, but globally inflation is high. In the US, it is above 6%, well above their target of 2%. So, inflation is back globally for the first time in decades, but this time it could be different. What should central banks, particularly those in emerging market economies, do? Much of the theory and understanding of inflation comes from studying the high inflation periods of the past, particularly in advanced economies (AE), in a closed economy setting. The last major episode being the Great Inflation period in the USA between 1965 and 1982. The world was very different then. The only global factor monetary authorities worried about was crude oil prices. Over the last three decades' inflation has become much more synchronised, not only in advanced 1675 words " Focus + 100% 1 W ENG 10:03 IN 27-01-2022 1W AutoSave (O of ) SET 1, ETQP, EEE, Term II, 2021-23 - Protected View . Saved to this PC 9 Search (Alt+Q) arvind tiwari X File Home Insert Draw Design Layout References Mailings Review View Help Comments Share Convergence in monetary policy is another reason why inflation is much more in sync across countries. Since the last sustained high inflation period in the 70s, there has been a sea-change in monetary policy making, and quite importantly it has become, broadly speaking, similar across countries. Since early 1990s, starting from New Zealand, more and more countries have adopted inflation targeting. India is a late comer to this group, and adopted inflation targeting in 2015. For AEs this goes a step further -target inflation rate has also converged to 2%. This convergence of monetary policy is not limited to conventional monetary policy of setting interest rates, often asset purchase programs have also happened in tandem. The latest demonstration of that has been in March 2020 when, following the onset of the Covid pandemic, an outflow started from the EMEs and the Cboe volatility index (VIX) shot up. A concerted effort in announcing asset purchase programs, in both AEs as well as EMEs, stemmed the outflow from EMEs and VIX came down to a lower level. However, it is not guaranteed that this kind of cohesion in monetary policy seen during the low inflation era will continue and, going forward, a big risk is that monetary policy may not be that well- coordinated across countries. The economic recovery might be asynchronous across countries. Central banks may have different inflation appetite depending on domestic factors including election cycles. This will take the world to an unfamiliar territory. In particular, the impact on emerging economies can be severe because of the externalities from the monetary policy decisions of other nations. Any sudden move by them can lead to a situation far worse than the taper tantrum of 2013. The MPC in India has been rather dovish so far and focussed more on supporting economic recovery than tackling inflation. There is a fine line - beyond a threshold, increase in inflation can be highly non-linear and it can spiral up very quickly. The safest way is to tackle inflation early on. The MPC keeping repo rates unchanged was probably expected, but continuing with the accommodation stance is questionable. Moreover, while MPC rightly identifies financial tightening globally as a risk factor to the recovery of the economy, it does not seem to acknowledge the globalization of inflation, nor any indication that it is prepared for an era of asynchronous monetary policy making across the globe and dealing with the spillover of monetary policy actions in the advanced economies. This is the time when the MPC has to establish its reputation in fighting inflation. It needs to acknowledge and identify the global risks and act accordingly. (a) Discuss the possible reasons for this increased co-movement of inflation in advanced and emerging economies. 5Marks) (b) Elaborate on the possible factors/ reasons for criticizing the accommodation stance of India's monetary policy in the current scenario. (5Marks) Page 4 of 4 1675 words " Focus + 100% 1 ENG 10:03 W IN 27-01-2022 1