Monetary Policy Case Study

Case Title:

Reserve Bank of India's Tightening Monetary Policy: An Impediment to Economic Growth?

Abstract:
India faced a steep inflationary pressure right from the beginning of the year 2008. In May 2008, inflation touched double digit figures and continued to move in an upward direction. The inflation was feared to choke the steady growth of the Indian economy. The Indian government took several steps to combat inflation. In July, the Reserve Bank, the central bank of India, also took action to tame the inflation as soon as it reached a thirteen year high, crossing 12.5%. RBI increased the repo rate and cash reserve ratio to indicate a tight monetary policy to be implemented. The central bank was able to withdraw a substantial amount of money through the tight monetary policy. However, this raised anguish and anger among the industrialists and businessmen in India. The tight monetary policy was viewed as a double whammy in the face of rising inflation. Some feared, that the policy would hamper business environment and affect the price sensitive sectors like manufacturing, automobiles and real estate etc. On the other hand, some economists argued that RBI's step was appropriate and quite expected. Those who are in favour of the policy believed that tight monetary policy would be an obstacle to economic growth in the short run, but would improve the growth prospects of the economy in the long-run.

Pedagogical Objectives:

• To understand the background of implementing strict monetary policy by the Reserve Bank of India.
• To analyse the sectoral impact of strict monetary policy.
• To highlight the net effect of the strict monetary policy.

Keywords : Reserve Bank of India, Inflation, Repo rate, Cash reserve ratio, Nationalisation, Monetary targeting policy, Multiple indicator approach, Open market operation, Price stability, Wholesale price index, Banking sector, Automobile industry, Real estate, Infrastructure, Housing loan