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Why there is a conflict between price stability and economic growth in RBI’s monetary policy?

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posted Sep 7 by Sumeet Vyas

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Whenever the RBI plans to make a monetary policy revision, there will be persistent demand from different quarters to reduce the repo rate. Government also expresses it desire for a reduced interest rate. But RBI hardly makes them counted and makes its own independent decision.

It seems that the RBI has different ideas about interest rate policy from business and the government. This divergence of interest is due to the famous conflict of interest in monetary policy between price stability and economic growth.

For the RBI, its monetary policy has three objectives:

  • Price stability
  • Financial stability
  • Provision of adequate credit (to support growth)

But the RBI’s primary responsibility is to ensure price stability. Central banks are born to fight inflation. Growth is a secondary objective and it is more important for the government. The most controversial side of monetary policy is that it is known to reduce inflation by reducing growth. Former Governor Subbaao has once mentioned that sacrificing little bit of growth is necessary to achieve price stability.

answer Sep 12 by Prajwal C.m.
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