Consider the following statements:
Statement-I: In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes.
Statement-II: Central Banks generally assume that they have the ability to counteract the rising consumer prices via monetary policy means.
Which one of the following is correct in respect of the above statements?
(a) Both Statement I and Statement II are correct and Statement II is the correct explanation for Statement I
(b) Both Statement-! and Statement-II are correct and Statement II is not the correct explanation for Statement-I
(c) Statement I is correct but Statement II is incorrect
(d) Statement I is incorrect but Statement II is correct
Ans: a
Explanation:
Monetary policy during covid the indian case
The COVID-19 pandemic scarred the global economy, causing unimaginable loss of life and livelihood.
At the height of the pandemic during 2020 and 2021, the Monetary Policy Committee (MPC) prioritised growth over inflation, given the frail economic conditions and notwithstanding intermittent inflationary pressures from supply shocks. Our monetary policy committee (MPC) reacted swiftly by reducing the policy repo rate sizeably by 115 bps in a span of two months (March-May 2020). Along with the rate cuts, significant quantum of liquidity was infused through both conventional and unconventional measures to stimulate the economy, restore confidence and revive market activity .
The liquidity infusion measures were mostly concentrated in 2020 but continued in 2021 in view of fresh waves of the pandemic and the fragile nature of economic recovery.
In early 2022, inflation was expected to moderate significantly however the outbreak of hostilities in Ukraine since end February 2022 changed the scenario. Initially, the shocks came from food and fuel prices, which were mainly global in origin, but local factors from adverse weather events also played an important role in increasing food inflation.
Moreover, strengthening domestic recovery and rising demand enabled pass-through of pent-up input costs to retail goods and services. This imparted stickiness to underlying core inflation and kept headline inflation at elevated levels.
Under these circumstances, the MPC quickly changed gears by prioritising inflation over growth and also changed its stance from being accommodative to withdrawal of accommodation.
The MPC in May 2022 raised the policy rate by 40 basis points. This was followed by rate hikes, In MPC has raised the policy repo rate by 250 bps cumulatively between May 2022 and February 2023.
A tight monetary policy by hiking the rates is followed by the central bank to counter inflation.
Hence, statement 1 and 2 are correct & statement 2 is the correct explanation of statement 1.
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