Page 37 - Banking Finance October 2024

ARTICLE

Beyond the Rate

Hike: Understanding

the effects of

Monetary Policy Ritesh Kumar Binani

Research Officer
Tightening in India State Bank Academy
Gurgaon

Globally Inflation started rising post April 2021 and went above the target range set by most of
the Central Banks. It had remained low and dormant for a substantial duration since the global
financial crisis. CPI inflation in developed countries such as US, UK and Euro zone, began to exceed
their traditional target of 2% and continue to stay at these elevated levels till recent time.

Abstract:
India, like many nations, faced rising inflation in 2021. To combat this, the MPC implemented a series of aggressive
monetary tightening measures. This study investigates the effectiveness of these policies in controlling inflation and
analyzes their impact on various economic aspects. The findings reveal a successful decline in inflation, achieved
through reduced liquidity, increased money market yields, and a shift in government securities markets. The introduction
of External Benchmark Lending Rates (EBLR) improved transmission of policy changes to bank lending rates. However,
a trade-off between inflation control and economic growth emerged, with GDP growth experiencing a slowdown. The
paper concludes that while the MPC's actions effectively curbed inflation, achieving a "soft landing" for the Indian
economy requires close monitoring and potentially adjusted future policies.

Introduction: Initially, the central banks felt that this sudden rise in
Globally Inflation started rising post April 2021 and went inflation would be temporary and transitory, so they
above the target range set by most of the Central Banks. continued with low interest rates and accommodative
It had remained low and dormant for a substantial duration stance. However, with passage of time global central
since the global financial crisis. CPI inflation in developed banks got convinced that the inflation has become
countries such as US, UK and Euro zone, began to exceed persistent, and they immediately needed to front load
their traditional target of 2% and continue to stay at these monetary tightening.
elevated levels till recent time. The initial rise in inflation
was primarily due to increase in demand from easing lock Bank of England (BoE) was the first to raise benchmark
down restrictions, rise in profit margins of corporates and rates in December 2021, followed by US Federal
recovery in energy and commodity prices etc. Reserve and European Central Bank (ECB) in March

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