Page 233 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes

Task Compare the contrast the monetary policies of India in the 1990s and 2000s.

Caselet India’s Inflated Monetary Policy Challenge

While central banks around the world are busy worrying whether to be hawks or doves,
the Reserve Bank of India is unlikely to find solace in either choice.
The RBI has been grappling with uncomfortably high inflation for more than a year
despite raising interest rates 11 times in 18 months. Growth indicators, meanwhile, have
proved unreliable given the uncertainty of a global recovery and still fragile domestic
business sentiment.
The latest data underscore the RBI’s dilemma. The wholesale price index rose 9.8% in
August, well above the RBI’s much-revised target of 7%. Industrial production data,
meanwhile, have been an unreliable indicator of growth. Industrial output grew 8.8% in
June, but slowed to 3.3% in July. This, in part, is due to a higher base from the previous
year but also reflects the wavering confidence of companies producing or buying capital
goods.

The RBI is partly to be blamed for landing itself in this unenviable position. Though it has
been one of the most aggressive central banks globally in the last year, it chose to increase
rates in small doses, bending to New Delhi’s—and the industrial lobby’s—desire to keep
growth robust. The bank has no control over the price rises caused by infrastructure
bottlenecks and supply constraints. But its predictable quarter-point rate increases at every
policy review failed to stop speculators from betting on further rises in inflation.
India’s economic growth is vulnerable to a deteriorating global outlook. High interest
rates at home are already taking a toll. A 10.1% fall in domestic car sales after a blistering
run of growth is one indication. On top of everything, the unreliability of India’s data
leaves its central bank with the unenviable task of picking the right indicators to guide its
policy.

With global commodity prices still high and a lack of fiscal restraint from New Delhi,
another quarter-point increase, expected Friday, may not be enough to curb inflation. The
RBI’s predicament, behind the curve, serves as a warning for other emerging-market
central banks.

Source: http://online.wsj.com/article/SB10001424053111904060604576572612381947514.html

13.3.2 Monetary Policy in an Open Economy

An open economy is free to trade with the other economies of different countries. This is in
sharp contrast with the closed economy where people are not allowed to trade with other
countries. An open economy is a field, which deals in Macro Economic phenomena like exchange
rates, balance of trade, tariffs, subsidies, and import quotas. An open economy is advantageous
because people can trade in goods and services; indulge in business with the international arena
at large. This increases the scope of trade and business leading to profitable earnings.

The opening up of the economy has implications for the conduct of monetary policy as well as
the monetary transmission mechanism. In particular, it has rendered economies vulnerable to

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