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Daily Edge 07-04-2025

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22 views3 pages

Daily Edge 07-04-2025

Uploaded by

chinthanaresh7537
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We take content rights seriously. If you suspect this is your content, claim it here.
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DAILY EDGE: 11-04-2025

“A cut in time”
Syllabus: GS-III: Indian Economy and issues relating to Planning, Mobilization of
Resources, Growth, Development and Employment.

“How can an accommodative monetary policy support economic growth during global trade
tensions? Examine its significance for India’s export sector.”

Introduction

Accommodative monetary policy refers to a pro-growth stance by a central bank,


characterized by lowering policy rates (like the repo rate), increasing money supply, and
ensuring adequate systemic liquidity. In the backdrop of global trade disruptions—such as
tariff wars and protectionist measures—such a policy acts as a counter-cyclical tool to
stimulate aggregate demand, stabilize output, and support vulnerable sectors, including
exports.

Role of Accommodative Monetary Policy in Supporting Economic Growth:

1. Stimulates Aggregate Demand:

Reduction in the repo rate lowers the cost of credit, incentivizing consumption and
investment.
It raises the marginal propensity to consume, boosting private final consumption
expenditure (PFCE), a major GDP component in India.
Example: RBI’s reduction of the repo rate to 6% (as per the passage) provided timely
relief to borrowers amid global uncertainties.

2. Enhances Credit Transmission and Liquidity:

Through instruments like Open Market Operations (OMOs), Long-Term Repo Operations
(LTROs), and Standing Deposit Facility (SDF), the RBI ensures adequate liquidity in the
banking system.
Improves credit uptake by both consumers and businesses, critical during a global
demand slowdown.
Example: The Targeted Long-Term Repo Operations (TLTROs) launched in 2020 infused
₹1 lakh crore into the system, helping NBFCs and MSMEs with capital at a time when
global demand was shrinking.
3. Encourages Gross Capital Formation:

Lower interest rates reduce the cost of capital, promoting gross fixed capital formation
(GFCF) in infrastructure, manufacturing, and services.

4. Counters External Sector Vulnerabilities:

With net exports shrinking due to global trade frictions, domestic demand needs to
compensate.
A dovish monetary stance supports domestic output stabilization in the face of falling
external demand.

Significance for India’s Export Sector:

1. Working Capital and Interest Cost Relief:

Exporters rely heavily on short-term credit for procurement and production.


A lower Weighted Average Lending Rate (WALR) reduces interest cost, enhancing
profitability and competitiveness.

2. Boosts Export Competitiveness:

An accommodative stance helps moderate currency appreciation, maintaining a


competitive real effective exchange rate (REER).
This supports India’s price-sensitive sectors like textiles, leather, and gems & jewellery.

3. Supports Export Diversification:

Availability of affordable finance allows firms to invest in technology upgradation,


product innovation, and market diversification.
For example, India’s pharmaceutical industry leveraged low-cost credit during COVID-19
to expand into Latin America and Africa.

4. Employment and MSME Stability:

Export-oriented MSMEs, forming part of India’s informal economy, are highly sensitive to
global shocks.
Cheaper and easier access to credit prevents disruptions, preserving employment
elasticity in these sectors.

5. Mitigates Impact of Trade Retaliations:

As seen in the US–China tariff conflict, retaliatory tariffs can distort global supply chains.
Domestic monetary easing cushions Indian exporters from these external shocks by
supporting input-side liquidity.

Conclusion
An accommodative monetary policy is a vital macroeconomic instrument to support
domestic economic resilience during global trade headwinds. By lowering the cost of
capital, increasing liquidity, and stabilizing financial markets, it not only sustains
domestic growth but also provides a lifeline to India's export sector. However, to
maximize its impact, it must operate in tandem with fiscal stimulus, logistics reforms,
and proactive trade diplomacy to create a globally competitive and shock-resilient
export ecosystem.

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