Time to Change the Monetary Policy Stance

The IMF has raised the alarm about the high leverage positions in the economies across the globe and the loose monetary policies being pursued by the central banks to increase the economic activities in their respective economies. The IMF is worried that the loose monetary policies and very high leverage in economies may result in instability due to increased financial vulnerability. Even the chances of financial crises are increasing due to the ballooning asset prices and credit boom across the economies.

Loose monetary policies and high leverage play a very important role in increasing economic activities during such crises. Many firms in India due to the easy availability of credit and the moratorium provided to the borrowers as well as the suspension of IBC have been able to survive and the economic activities are back to pre-COVID period. But other economic factors indicate that RBI has to change the direction of the monetary policy.

It is expected that the RBI will maintain the accommodative and loose monetary policy stance in its upcoming Monetary Policy Committee (MPC) meeting to be held in the month of April and the growth will continue to drive the policy stance of the central bank as well as policy responses from the government. But the RBI cannot continue in this direction for long considering the inflationary pressure that has been building up in the economy and will have to increase the key policy rates to tame the inflation and the increasing leverage position.

Rajeev Upadhyay