Roadmap for Answer Writing: 1. Introduction (50-75 words) Define Monetary Policy Framework: Begin by explaining what the monetary policy framework is and its purpose. Mention that India’s monetary policy framework aims to manage inflation, support growth, and maintain stability in the economy. Context: ...
Model Answer Benefits of Internationalizing the Rupee Mitigation of Currency Risks The internationalization of the rupee can help Indian businesses reduce currency risks associated with global trade. By conducting cross-border transactions in rupees, companies can shield themselves from exchange ratRead more
Model Answer
Benefits of Internationalizing the Rupee
- Mitigation of Currency Risks
The internationalization of the rupee can help Indian businesses reduce currency risks associated with global trade. By conducting cross-border transactions in rupees, companies can shield themselves from exchange rate volatility, which in turn lowers transaction costs and helps stabilize their operations in international markets. This improves their ability to compete globally (Source: Author’s content). - Better Bargaining Power for Indian Businesses
With reduced exposure to currency fluctuations, Indian businesses could gain better leverage in negotiations with foreign partners. This would not only reduce costs but also improve the prospects for growth, making Indian businesses more attractive to global markets (Source: Author’s content). - Boosting Foreign Trade
Using the rupee in international trade would allow India to make independent trade decisions, avoiding the influence of major currencies like the US dollar. This could provide India with more flexibility in setting favorable terms for its exports and imports (Source: Author’s content). - Prevention of Income Loss
Internationalizing the rupee could reduce the need for India to hold large foreign reserves, which currently incur a cost in the form of income transfers to advanced economies. This would help retain more financial resources within India (Source: Author’s content). - Improved Investment Flows
The rupee’s internationalization could facilitate smoother access to global capital, encouraging investment in India’s economy. This influx could enhance national savings and spur economic growth (Source: Author’s content).
Risks of Internationalizing the Rupee
- Heightened Vulnerability to External Shocks
With the increased use of rupees abroad, foreign investors might hold substantial rupee reserves, which could potentially destabilize the Indian economy if global conditions worsen, as foreign capital could quickly move in or out (Source: Author’s content). - Challenges to Monetary Policy
The central bank’s ability to control the domestic money supply and influence interest rates could be compromised as a result of rupee internationalization. This would require stronger policy tools to manage external influences on the domestic economy (Source: Author’s content). - Increased Market Volatility
Non-resident holdings of rupees might increase the sensitivity of India’s financial markets to global economic shifts, leading to higher volatility in domestic markets (Source: Author’s content). - Uncontrolled Capital Flows
Full convertibility could lead to unrestricted capital inflows and outflows, making India more susceptible to the risks of sudden financial market changes, such as a “risk-off” scenario where foreign investors pull out funds quickly (Source: Author’s content).
In conclusion, while the internationalization of the rupee offers significant opportunities for India’s economic growth, it also introduces challenges that need careful management. The benefits of enhanced global trade and investment must be weighed against the risks of increased volatility and external dependency.
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Model Answer Monetary Policy Framework in India India’s monetary policy framework, established through the Monetary Policy Framework Agreement (MPFA) signed in February 2015, emphasizes flexible inflation targeting (FIT). This framework mandates the Reserve Bank of India (RBI) to achieve an inflatioRead more
Model Answer
Monetary Policy Framework in India
India’s monetary policy framework, established through the Monetary Policy Framework Agreement (MPFA) signed in February 2015, emphasizes flexible inflation targeting (FIT). This framework mandates the Reserve Bank of India (RBI) to achieve an inflation target set by the government in consultation with the central bank. The inflation target is set at 4%, with a ±2% tolerance band, determined every five years (Source: Author’s content).
A key feature of the monetary policy framework is the establishment of the Monetary Policy Committee (MPC), which consists of six members, including the RBI Governor. The MPC is tasked with setting the policy rate to align inflation with the target. It uses various instruments such as open market operations, reserve requirements, and the policy rate to achieve operational targets like short-term money market interest rates and reserve money (Source: Author’s content).
The overarching goals of India’s monetary policy are price stability, economic growth, financial stability, and exchange rate stability. These goals aim to ensure a stable economic environment conducive to growth while controlling inflation and maintaining currency stability (Source: Author’s content).
Challenges in Monetary Management
Despite a well-defined framework, India faces several dilemmas in monetary management:
Conclusion
The monetary policy framework in India is well-structured, focusing on inflation control, economic growth, and stability. However, the central bank faces multiple challenges such as balancing growth with inflation, managing fiscal and monetary tensions, and addressing external sector pressures. To address these dilemmas effectively, coordination between the RBI and the government is crucial, especially in the context of global economic integration (Source: Author’s content).
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