Roadmap for Answer Writing Introduction (30-40 words) Define sterilization in the context of monetary policy. Briefly explain the purpose of sterilization, i.e., neutralizing the effects of capital inflows or outflows on the domestic money supply. What is Sterilization? (70-80 words) Provide a clear definition of ...
Model Answer Key Challenges Faced by India's Livestock Sector Low Productivity: Indigenous breeds have significantly lower productivity compared to foreign varieties, making them less beneficial for farmers . High Incidence of Diseases: Cross-breeding programs have improved livestock quality but havRead more
Model Answer
Key Challenges Faced by India’s Livestock Sector
- Low Productivity: Indigenous breeds have significantly lower productivity compared to foreign varieties, making them less beneficial for farmers .
- High Incidence of Diseases: Cross-breeding programs have improved livestock quality but have also increased susceptibility to diseases like haemorrhagic septicaemia and swine fever, leading to economic losses for farmers .
- Inadequate Infrastructure: There is a shortage of veterinary institutions, vaccines, cold storage facilities, and extension services, which hampers livestock health and productivity .
- Lack of Institutional Credit: Farmers often struggle to access credit, which limits their ability to invest in better livestock management practices .
- Informal Livestock Markets: The livestock market remains largely informal, making it difficult for farmers to get fair prices for their animals .
- Shortage of Feed and Fodder: Only 5% of cropped area is used for fodder production, and the area under permanent pastures is decreasing, leading to feed shortages .
- Lack of Inclusivity: Unconventional milk sources like camel and yak are not adequately included in policies and programs .
- Globalization Challenges: Unfavorable food safety and quality norms hinder the potential for export growth in the livestock sector .
Proposed Measures to Overcome Challenges
- Strengthening Market Linkages: Establish cooperatives and producers’ associations to improve connections between production and markets.
- Promoting Automation: Implement livestock farm automation systems to enhance efficiency and product quality.
- Increased Funding: Explore additional funding under schemes like Rashtriya Krishi Vikas Yojana (RKVY) to improve veterinary health services.
- Mobile Veterinary Clinics: Establish a network of Mobile Veterinary Clinics (MVC) to provide services in remote areas.
- Increase Veterinary Colleges: Expand the number of veterinary colleges to address the shortage of trained professionals.
- Private Sector Investments: Encourage investments from private companies and cooperatives to enhance veterinary infrastructure.
- One-Stop Centre for Livestock Issues: Create a centralized hub for information and solutions to livestock-related problems, aiding in disease eradication.
By addressing these challenges through the proposed measures, the livestock sector can significantly contribute to rural livelihoods and help achieve the goal of doubling farmers’ income.
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Sterilisation And Money Supply Management: Reserve Bank Of India (RBI) Money market operations often referred to as sterilization, involving official actions that prevent the money stock from rising when inflows of capital increase the central bank's reserve or deposits. It means counteracting the eRead more
Sterilisation And Money Supply Management: Reserve Bank Of India (RBI)
Money market operations often referred to as sterilization, involving official actions that prevent the money stock from rising when inflows of capital increase the central bank’s reserve or deposits. It means counteracting the external impact of money coming in (or out) by adjusting the money supply to avoid external sources of too much inflation or deflation. In this article we will talk about what is sterilization and how RBI adopts it to control the money supply in the economy and protect the economy from external shocks.
What is Sterilization?
Sterilization is the process by which a central bank neutralizes the impact of capital inflows or outflows on the money supply. So while you sleep, more capital and inflation. In order to experience a significant outward flow of the capital may neutralize outward money supply, which can subsequently lead to deflation and/or reduce the economy. To mitigate these effects, central banks use sterilization techniques.
There are two major methods of sterilization:
Based on open market operations: When there is a surplus of capital in the economy due to inflow of money, the central bank sells government securities to the public or financial institutions. This drains liquidity from the system, reduces the money supply and combats inflation.
When capital outflows create a scarcity of money, the central bank purchases government securities in the market. This injects cash into the system, expanding the money supply and helping to prevent deflation or the economy from shrinking.
Reserve Bank of India (RBI) sterilization
The Reserve Bank of India (RBI), the apex bank governing the economy and the banking system in India, is the most significant pillar to ensure price stability and economic growth in the Indian economy. Sterilisation is its most important tool to counter the negative effect of external economic shocks.
Here’s how the RBI uses sterilisation:
Capital Inflows and Inflation
Inflows Scenario: Being an emerging economy and capital market, India welcomes many foreign direct investment (FDI) and foreign institutional investments (FII) as one more point of reference to you. International capital inflows of money create demand for the rupee, leading to an appreciation in rupee terms as well as an increase in the money supply.
RBI Takes Action: If inflation is the target, the RBI can operationally sell government securities. This kind of steps drains the excess liquidity and allows gold with inflation and keeps the value of rupee within a constant frame.
Capital Flight and Deflation
Example of Outflow Scenario: In times of economic instability or global recession, foreign investors may withdraw their capital from India, leading to a decrease in demand for the rupee and subsequently its depreciation. This can reduce the money supply and pose a risk of deflation or an economic contraction.
What RBI Can Do: The RBI can purchase government securities to counter this. Thereby this act infuses liquidity in the system & strengthens the money supply which in turn helps in stabilizing the economy.
Use of Special Instruments
Liquidity Adjustment Facility (LAF) : LAF allows the RBI to manage daily variation in liquidity through repo and reverse repo transactions. Repo operations mean the RBI lends to the commercial banks, and reverse repo operations are the other way, when it borrows from them. These operations can help to sterilize the impacts of capital inflows, and outflows.
Market Stabilization Scheme (MSS) : MSS is a special issue of the government securities so as to absorb excess liquidity from the market. These are also government securities managed by the Reserve Bank of India (RBI) — that is, they manage the money supply without directly impacting the fiscal deficit.
Foreign Exchange Reserves
Building up Reservers: The RBI can also build up foreign exchange reserves to protect the economy from external shocks. The RBI can use those reserves to buy or sell the rupee in the foreign exchange market to adjust and stabilise its value.
Another aspect of the fighting the fall: With capital outflows, the RBI can utilise its foreign exchange reserves to beat back the downward trend of the rupee, because not only will this serve to prop up the value of the rupee, it will also stave off a fall in the money supply.
Challenges and Considerations
And sterilization is a good one, but it has challenges and cautions that go along with that:
Cost on Sterilisation: Selling or purchase of government securities incurs cost to the RBI. If the sterilization operations are significant, the interest paid on these securities is onerous.
Interest Rates: Sterilization effects can be problematic at this moment, for the central bank in terms of interest rates. For instance, selling securities can push interest rates higher, which makes it more expensive for companies to lend and can be a drag on economic growth.
Sterilization: If introduced, this varies with the scale and timing of the intervention. However, it does not fully propagate the external shocks if the intervention comes too small or too late.
Conclusion
Sterilisation is an important monetary policy tool in the Reserve Bank of India (RBI) toolbox. The use of the domestic money supply to buy off external capital flows, by the RBI is the equivalent to keep prices stable and aid growth. However, there are challenges that the Government and the RBI face in this process and the RBI is continuously improving its sterilization methods to make sure that the Indian economy is resilient from external shocks.
But to truly explore the meaning and working of sterilization as well as the role of the RBI in it – important for the stakeholders of the Indian financial system, policy makers, investors and citizens, who all have a vested interest in pumping the glares over how it can impact the economic environment and the financial stability of the country.
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