“Monetary easing without adequate liquidity is like pressing the accelerator with the handbrake on”. Analyse India’s recent experience of rate cuts with tight liquidity. Suggest measures to strengthen monetary transmission.
Kartavya Desk Staff
Topic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment
Topic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment
Q4. “Monetary easing without adequate liquidity is like pressing the accelerator with the handbrake on”. Analyse India’s recent experience of rate cuts with tight liquidity. Suggest measures to strengthen monetary transmission. (15 M)
Difficulty Level: Medium
Reference: IE
Why the question Despite repo rate cuts, India has recently witnessed tight banking system liquidity, raising questions about the real effectiveness of monetary easing. Key Demand of the question The question requires you to explain why liquidity shortage weakens the impact of rate cuts and analyse India’s recent experience of easing under tight liquidity. It also asks you to suggest practical measures to improve monetary transmission in such conditions. Structure of the Answer: Introduction Begin with linking repo rate as the “signal” and liquidity as the “fuel” of monetary policy, and briefly mention the transmission challenge in India. Body Explain the statement by showing how liquidity deficit hardens money market rates and blocks pass-through despite repo cuts. Analyse India’s recent context of rate cuts alongside tight system liquidity due to government cash surplus, forex operations and low NDTL liquidity. Suggest measures such as durable liquidity infusion, CRR/OMO tools, better government cash coordination and stronger pass-through in lending benchmarks. Conclusion Conclude with a forward-looking line that effective monetary policy requires synchronising the policy rate with liquidity operations to ensure credit reaches productive sectors.
Why the question
Despite repo rate cuts, India has recently witnessed tight banking system liquidity, raising questions about the real effectiveness of monetary easing.
Key Demand of the question
The question requires you to explain why liquidity shortage weakens the impact of rate cuts and analyse India’s recent experience of easing under tight liquidity. It also asks you to suggest practical measures to improve monetary transmission in such conditions.
Structure of the Answer:
Introduction
Begin with linking repo rate as the “signal” and liquidity as the “fuel” of monetary policy, and briefly mention the transmission challenge in India.
• Explain the statement by showing how liquidity deficit hardens money market rates and blocks pass-through despite repo cuts.
• Analyse India’s recent context of rate cuts alongside tight system liquidity due to government cash surplus, forex operations and low NDTL liquidity.
• Suggest measures such as durable liquidity infusion, CRR/OMO tools, better government cash coordination and stronger pass-through in lending benchmarks.
Conclusion
Conclude with a forward-looking line that effective monetary policy requires synchronising the policy rate with liquidity operations to ensure credit reaches productive sectors.