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Tags Current Affairs

Challenges for policymakers in 2021

Date: 29 December 2020 Tags: World Economy

Issue

Over the past few weeks, India seems to have broken the link between rising levels of mobility and COVID-19 cases. The number of new cases has fallen while the fatality rate continues to drop.

 

Background

As India looks to emerge from the pandemic, it remains to be seen how the government will handle other emerging challenges.

 

Details

  • The last quarter saw an improvement in growth as consumers were eager to spend, especially on festival-related items, bolstered by higher-than-usual financial savings.

  • While much of the fiscal support packages around the world have been directed towards safeguarding the vulnerable like poorer households and small businesses, there were some such as the urban poor being left out.

  • In order to handle effects of the pandemic, the government has been on spending spree. It has infused liquidity into the market to generate demand.

  • Inflation control could be the main task facing policymakers in 2021. The RBI may have to take steps to gradually drain the excess liquidity in the banking sector, provide a floor for short-term rates and finally narrow the policy rate corridor by raising the reverse repo rate.

Tackling inflation

  • Inflation occurs when an economy grows due to increased spending. When this happens, prices rise and the purchasing power of the currency within the economy is worth less than it was before.

  • One popular method of controlling inflation is through a contractionary monetary policy. The goal of a contractionary policy is to reduce the money supply within an economy by decreasing bond prices and increasing interest rates. 

  • The second tool is to increase reserve requirements on the amount of money banks are legally required to keep on hand to cover withdrawals.

  • ? The more money banks are required to hold back, the less they have to lend to consumers. If they have less to lend, consumers will borrow less, which will decrease spending.

  • The third method is to directly or indirectly reduce the money supply by enacting policies that encourage the reduction of the money supply.

  • This includes calling in debts that are owed to the government and increasing the interest paid on bonds so that more investors will buy them.?

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