The Reserve Bank of India (RBI) must bring in more liquidity into the banking system, according to C Rangarajan, Chancellor of ICFAI Foundation for Higher Education, Hyderabad, and former Governor of Reserve Bank of India.
While delivering a lecture on “Evolving Contours of Monetary Policy” at ICFAI , Rangarajan said the government had increased expenditure on healthcare, among others, to kick-start the economy hit by Covid-19.
The government had also taken steps like lowering the repo rate and injecting liquidity into the system to stimulate the economy. However, the central bank must bring in more liquidity into the banking system, the noted economist and former chairman, Prime Minister’s Economic Advisory Council said.
Some stimulus was also needed for sectors like textiles and tourism, he added.
Monetary policy
Speaking on the monetary policy, Rangarajan said the impact of the actions of the monetary authorities on the economy depends on the reaction of the business units to changes in interest rate.
In any economy, price stability was important as it would increase the savings rate. In the environment of rising inflation investments might get diverted to speculative attributes, he added.
While in developed economies inflation beyond 2 per cent is considered undesirable, in India, the Central Bank decided to keep the inflation at 4 per cent per annum plus or minus 2 per cent.
The actions of monetary authorities can influence the economy through change of money supply and interest rate, he said. He also opined that Central banking is no longer the application of well-known tools to well-known problems as the issues that surface were “very complex.”