Q.3) How the challenge of taming the inflation for RBI is different during the second covid wave as compared to the first? How RBI dealt with the ‘impossible trinity’ during the two waves? (10 Marks)

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Swatantra

“Mentor’s Comments”

https://www.livemint.com/opinion/columns/prices-profits-and-the-pandemic-what-rbi-could-do-11622657858665.html
In the intro, mention the important role played by the central bank during both the waves to soften the blows of pandemic for economy.
In the body, mention the difference in inflationary pressure this time as the global recovery due to asymmetric global recovery which resulted in the rising prices globally. Next discuss the differences in the challenges RBI faced in dealing with the impossible trinity during the two waves in which it had to stabilise the rupee, maintain the low interest rate while keeping an eye on inflation.
Conclude by mentioning the need for the RBI to focus on the inflation taming as real interest rates are entering into the negative territory.

Comments

30 responses to “Q.3) How the challenge of taming the inflation for RBI is different during the second covid wave as compared to the first? How RBI dealt with the ‘impossible trinity’ during the two waves? (10 Marks)”

June 4, 2021

subhashree mallick

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1. June 8, 2021
  
  Swatantra
  
  Subhashree
  
  You have written well, introduction is good. In 1st part, although you have written some of the differences in both waves, mention that in last wave global prices remained down, so inflation was mainly due to domestic supply side logistic and transportation constraints whereas this year, due to global asymmetric recovery, global prices are up. Use simpler language.
  
  In 2nd part, first mention what do you understand by impossible trinity in clearer terms(stabilise the rupee, maintain the low interest rate while keeping an eye on inflation).
  
  Next write how RBI handled last year
  
  bought dollars to prevent the rupee from strengthening too much
  purchased government bonds to keep bond yields from spiraling out of control
  this created excess rupee liquidity in the banking system,
  which over time can stoke inflation and other financial imbalances.
  
  You can make a flowchart also, it will look better
  
  Then write that this year –the current account moving into deficit, we expect the balance of payments surplus to fall, so RBI may not have to purchase as many dollars as last year.
  
  Conclude by saying if the need to buy dollars is lower than last year, RBI could gradually shift the focus to controlling inflation and plan a gradual exit from loose monetary policy.You can use the quote then. You need to bring more clarity in the 2nd part of the answer.
  
  Read some other answers. Keep writing.
June 4, 2021

Kartikey Singh

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1. June 8, 2021
  
  Swatantra
  
  Kartikey
  
  You have answered the 2nd part of the question nicely, but regarding 1st part you need to mention differences in the characteristic of inflation.
  
  Mention that in last wave global prices remained down, so inflation was mainly due to domestic supply side logistic and transportation constraints, which although remained for some time but eased down when supply side bottlenecks were solved
  In this wave, due to global asymmetric recovery, global prices are up, also inflation has not yet shown up because producers haven’t shifted prices of input to output fearing lack of demand in lockdown conditions but as soon as things become normal they are expected to do so- so RBI might have to intervene via monetary policy unlike last year.
  
  Rest of the answer is sufficient. You can use flowcharts for better presentation. Keep writing.
June 4, 2021

shivanshu pandey

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1. June 8, 2021
  
  Swatantra
  
  Shivanshu
  
  In 1st part, explain how inflation after this wave is different from last– mention that in last wave global prices remained down, so inflation was mainly due to domestic supply side logistic and transportation constraints whereas this year, due to global asymmetric recovery, global prices are up. Inflation has not yet shown up because producers haven’t shifted prices of input to output fearing lack of demand in lockdown conditions but as soon as things become normal they are expected to do so- so RBI might have to intervene via monetary policy unlike last year.
  You have mentioned wpi, cpi etc but you need to mention why wpi didn’t rise last year but is on rise this year.
  
  In 2nd part, first mention what do you understand by impossible trinity in clearer terms(stabilise the rupee, maintain the low interest rate while keeping an eye on inflation) and then proceed with the answer, you have written.
  
  Read some other answers also. Keep writing.
June 4, 2021

Siddharth Kaushal

Plz review sir

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1. June 8, 2021
  
  Swatantra
  
  Siddharth
  
  I think you have uploaded the wrong question here, please upload the right answer in right place for timely evaluation.
  
  I will try to review this when I review related question.
June 5, 2021

Mradul sharma

ref id – #0000422539.

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1. June 8, 2021
  
  Swatantra
  
  Mradul,
  
  You need to structure this answer better. The explanation you have given under inflation, mention it first as the first part of the question is asking about that (how is inflation characteristic differing this year from last year).
  
  Impossible trinity, you have written well, first two points about interest rate are good- now link these points with inflation- points 1 and 2 created excess rupee liquidity in the banking system,
  which over time can stoke inflation and other financial imbalances.
  
  This year the need to buy dollars is lower than last year, RBI could gradually shift the focus to controlling inflation and plan a gradual exit from loose monetary policy unlike last year(it was tough to do last year).
  
  Conclusion is fine. Keep practicing more.
June 5, 2021

deepika annamalai

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1. June 8, 2021
  
  Swatantra
  
  Deepika
  
  You have attempted well but there are some issues. First of all you need a bit of conceptual clarity, so you can read a bit more on how exchange rate, interest rate and inflation, are linked for e.g. you have mentioned that increase in reverse repo rate will increase liquidity, however, that is not the case- increase in reverse repo decreases money supply as banks will want to park their funds with RBI so less liquidity.
  
  Regarding inflation you have to mention what is different this year, you have simply quoted statements from article
  mention that in last wave global prices remained down, so inflation was mainly due to domestic supply side logistic and transportation constraints whereas this year, due to global asymmetric recovery, global prices are up. Inflation has not yet shown up because producers haven’t shifted prices of input to output fearing lack of demand in lockdown conditions but as soon as things become normal they are expected to do so- so RBI might have to intervene via monetary policy unlike last year.
  
  Read some other good answers to get a perspective. Keep practicing.
June 5, 2021

Arpit Singh

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1. June 8, 2021
  
  Swatantra
  
  Arpit
  
  You have attempted well, but in the 1st part you have made some factual mistakes, RBI never increased the repo rate after the pandemic set in, it kept its stance accomodative as the inflation after 1st wave was not due to money supply, it was mainly due to supply side bottlenecks and logistics and transportation issues. So when lockdown was lifted last year, these issues were somewhat taken care of and hence inflation also was in control. However, this year that might change as price rise is because globally prices are rising due to asymmetric recovery etc. So this time RBI might have to interfere via increasing repo rate or atleast keeping the stance neutral, that is the difference you have to write.
  
  In 2nd part, you have written about last wave, try to compare it with how things are different this time- this year with the current account moving into deficit, we expect the balance of payments surplus to fall, so RBI may not have to purchase as many dollars as last year.
  
  So, if the need to buy dollars is lower than last year, RBI could gradually shift the focus to controlling inflation and plan a gradual exit from loose monetary policy.
  
  Conclusion is okay, your concepts need to be clear in such questions otherwise there is a risk of getting it totally wrong. Anyways, you have tried well.
  
  Keep writing.
June 5, 2021

Santosh kharat

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1. June 8, 2021
  
  Swatantra
  
  Santosh,
  
  You have neglected the first part of the question about how inflation is different this year.
  Mention that in last wave global prices remained down, so inflation was mainly due to domestic supply side logistic and transportation constraints, which although remained for some time but eased down when supply side bottlenecks were solved
  In this wave, due to global asymmetric recovery, global prices are up, also inflation has not yet shown up because producers haven’t shifted prices of input to output fearing lack of demand in lockdown conditions but as soon as things become normal they are expected to do so- so RBI might have to intervene via monetary policy unlike last year.
  
  You have addressed the 2nd part well but bring some conceptual clarity regarding these topics, otherwise it will be difficult. You have mixed up things.
  
  Impossible trinity, you have written well, first two points about interest rate are good- now link these points with inflation- buying bonds and dollars created excess rupee liquidity in the banking system,
  which over time can stoke inflation and other financial imbalances.
  
  This year the need to buy dollars is lower than last year, RBI could gradually shift the focus to controlling inflation and plan a gradual exit from loose monetary policy unlike last year(it was tough to do last year).
  
  Keep writing to improve.
June 6, 2021

Vishnu Agrawal

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1. June 8, 2021
  
  Swatantra
  
  Vishnu
  
  Please try to scan the image and then upload, otherwise use deeper ink to write.
  
  Regarding this answer, you have written well. You have covered the core demands of the question and conceptually also it seems you have clarity.
  
  In 1st part you can add some points, last year inflation was more about CPI with WPI remaining in control throughout, this might change this year with inflationary pressure on WPI.
  
  In 2nd part mention why RBI might not have to buy dollars this time around-the current account moving into deficit, we expect the balance of payments surplus to fall.
  
  Rest of the answer is good, keep improving.
June 6, 2021

ankita thakur

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1. June 8, 2021
  
  Swatantra
  
  Ankita
  
  You need to structure the answer better, first write about inflation and what is the difference this time. WPI point you can write here.
  Then, mention that in last wave global prices remained down, so inflation was mainly due to domestic supply side logistic and transportation constraints whereas this year, due to global asymmetric recovery, global prices are up. Inflation has not yet shown up because producers haven’t shifted prices of input to output fearing lack of demand in lockdown conditions but as soon as things become normal they are expected to do so- so RBI might have to intervene via monetary policy unlike last year.
  
  Regarding 2nd part, you have written the 1st two paragraphs very well explaining what happened last year. Again, mention what is the difference this year- this year the need to buy dollars is lower than last year, RBI could gradually shift the focus to controlling inflation and plan a gradual exit from loose monetary policy unlike last year(it was tough to do last year).
  
  Keep writing. Use keywords from the question and then give the sub headings accordingly. It will be better to organize the answer.
  
  Keep practicing. Read some other answers.
June 6, 2021

Vivek H

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1. June 8, 2021
  
  Swatantra
  
  Vivek
  
  You have addressed the first part of the question about inflation quite well. In 2nd part link buying bonds and dollars by RBI last year with inflation, then compare it with this year(what is the difference)
  
  Last year buying bonds and dollars created excess rupee liquidity in the banking system,
  which over time can stoke inflation and other financial imbalances.
  
  This year the need to buy dollars is lower than last year (because the current account moving into deficit, we expect the balance of payments surplus to fall) RBI could gradually shift the focus to controlling inflation and plan a gradual exit from loose monetary policy unlike last year(it was tough to do last year).
  
  Mentioning these will complete your answer in an organic flow. Keep practicing, we’ll improve.Read some of the other good answers.
June 6, 2021

Utkarsha Yadav

Please review Sir
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1. June 8, 2021
  
  Swatantra
  
  Utkarsha
  
  You have missed out on the first part. Mention how was inflation caused after 1st wave and how is it different this year.
  
  Mention that in last wave global prices remained down, so inflation was mainly due to domestic supply side logistic and transportation constraints, which although remained for some time but eased down when supply side bottlenecks were solved
  In this wave, due to global asymmetric recovery, global prices are up, also inflation has not yet shown up because producers haven’t shifted prices of input to output fearing lack of demand in lockdown conditions but as soon as things become normal they are expected to do so- so RBI might have to intervene via monetary policy unlike last year.
  
  You can also mention that last year WPI was more or less stable, with inflationary pressure from CPI, however, this year WPI is also showing inflationary pressure.
  
  Diagram and 2nd part are good, you have covered most things. This is a conceptual question so you can cut down on the steps taken by RBI which you have mentioned in last part if there is word limit issue.
  
  Keep practicing. Try to address all parts of the question.
June 6, 2021

Yamini Khosla

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1. June 8, 2021
  
  Swatantra
  
  Yamini
  
  You have written 1st part to the point, it’s good.
  
  Regarding 2nd part,
  
  You can explain ‘impossible trinity’ in 1-2 lines (how is it difficult to maintain all three). In conclusion you can mention RBI has more space for monetary police tweaks this time(taking a neutral stance) as it doesn’t have to pump liquidity unlike last time, not having to buy dollars will also play a role in this.
  
  Rather than saying, things seem easy this will give more nuance to the answer, try to use more keywords(accomodative monetary policy, neutral monetary policy etc)
  
  You have covered most of the demands of this question, keep it up. Keep practicing.
June 6, 2021

Harshaa Sharma

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1. June 8, 2021
  
  Swatantra
  
  Harshaa
  
  Please upload right answer in right place. I think you have interchanged GS2 and GS3. Also write answer on UPSC style notebook or A4 size sheets. This will make you realize how much to write, when to stop etc in exam otherwise it will become difficult.
  
  Try to follow the rule of introduction-body-conclusion. Take keywords from the question and use it as sub-heading. For e.g in this question you can write an introduction, then some points under steps taken for consolidation of relationship, then some points under what are the issues and finally a forward looking conclusion.
  
  Your content is good for giving an overview, just make it more exam-oriented. For e.g mention 1971 liberation of B’desh, treaty of friendship 1972 , land boundary agreement 2015, maritime boundary arbitration 2014, composite border management plan, border haats, connectivity between kolkata and agartala via bangladesh– these are some concrete steps taken by both countries, so mention these. Otherwise answer becomes very generic.
  
  Also mention some points about trade, give some figures(total trade value etc). In issues you can mention how unfavorable trade balance is a cause of concern for Bangladesh.
  
  Conclusion is fine, start structuring your answer better, that is necessary for good marks. Keep practicing.
June 7, 2021

Sakshi Jain

#0000416382
@Swatantra sir please review

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1. June 8, 2021
  
  Swatantra
  
  Sakshi,
  
  You have answered the 2nd part of the question nicely, but regarding 1st part you need to mention differences in the characteristic of inflation.
  
  Mention that in last wave global prices remained down, so inflation was mainly due to domestic supply side logistic and transportation constraints, which although remained for some time but eased down when supply side bottlenecks were solved
  In this wave, due to global asymmetric recovery, global prices are up, also inflation has not yet shown up because producers haven’t shifted prices of input to output fearing lack of demand in lockdown conditions but as soon as things become normal they are expected to do so- so RBI might have to intervene via monetary policy unlike last year.
  
  Rest of the answer is good, in introduction you can mention RBI’s role in recovery, as you have wrote about impossible trinity in the body. Repetition avoided is better.
  
  In conclusion, avoid using accommodative stance as this year RBI might adopt a neutral stance due to falling real interest rate and rising inflation.
  
  Read some other answers. Keep practicing. Good attempt.