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The Reserve Bank of India’s (RBI) recent monetary policy announcement maintained the status quo on key rates and other parameters. In a scenario where the Indian economy is witnessing robust growth, the central bank’s decision comes at a critical juncture. The absence of major changes, particularly with no specific moves aimed at equity concerns, raises important questions about the role of monetary policy in fostering equitable growth. This blog delves into the implications of the RBI’s decision, and how monetary policy can be a lever for promoting not only economic growth but also inclusive development.

The Current Monetary Policy Stance

The RBI has kept the repo rate unchanged at 6.50%, reflecting a cautious stance despite strong economic growth projections. GDP growth for FY 2024 is expected to be 6.5% to 7%. Inflation still remains in tolerance limit of the RBI’s inflation target (4%, +/- 2%).

This balancing act between controlling inflation and supporting growth has become a hallmark of the RBI’s approach. However, the decision to refrain from introducing policies aimed at enhancing equity—such as sector-specific lending boosts or targeted financial inclusion measures—suggests that the central bank is primarily focused on macroeconomic stability rather than directly addressing wealth and income disparities.

The Role of Monetary Policy in Equitable Growth

Monetary policy is a powerful tool that influences not only inflation and economic output but also the distribution of wealth and income within an economy. However, its impact on equitable growth depends on the instruments used and the broader socio-economic environment. While monetary policy traditionally focuses on inflation control, employment, and financial stability, it also plays a role in shaping how the benefits of economic growth are shared across different segments of society.

1. Interest Rates and Access to Credit: Monetary policy affects interest rates, which in turn influences access to credit for businesses and consumers. Lower interest rates, for example, make borrowing cheaper, which can stimulate investment and consumption. However, if access to credit is not evenly distributed—favoring larger corporations over small businesses or urban areas over rural ones—it can exacerbate inequality. The RBI’s decision to keep interest rates steady maintains the status quo, which, while stabilizing for the economy, does little to directly address credit access disparities.


2. Inflation Control and Income Inequality: Inflation disproportionately impacts low-income households because they spend a larger share of their income on necessities like food and fuel, which are sensitive to price changes. By keeping inflation under control, the RBI’s policy helps protect the purchasing power of the poor. However, inflation targeting alone does not bridge the income gap. In fact, during high growth periods, inflation control without complementary policies can widen income inequality as wealthier segments, particularly those with investments in capital markets, benefit more from growth.


3. Financial Inclusion: The RBI has taken steps in the past to enhance financial inclusion through initiatives such as the Pradhan Mantri Jan Dhan Yojana (PMJDY) and priority sector lending (PSL). Yet, in this policy cycle, no additional measures were introduced to expand access to financial services for marginalized populations. A more proactive approach, such as directing banks to extend more credit to rural areas or small and medium enterprises (SMEs), could foster more equitable growth by ensuring that economic opportunities reach the underserved.


4. Liquidity and Employment: While liquidity injections through open market operations or lower cash reserve ratios can support economic activity, their benefits are often skewed towards sectors with higher access to capital. This can inadvertently widen the income gap unless coupled with policies that target job creation in labor-intensive sectors. The RBI’s current liquidity management focuses on controlling inflation without directly addressing job creation, particularly in sectors that could drive equitable growth, such as agriculture or rural infrastructure.

The Equity Gap in India’s Growth Story

Despite India’s impressive GDP growth trajectory, the benefits have not been evenly distributed. According to a report  the wealth of India’s richest 1% was more than four times the wealth held by the bottom 70% of the population in 2020. While overall poverty rates have declined, inequality has increased sharply, particularly in urban areas where high-income households have seen disproportionate gains.

Data from the World Inequality Report (2022) further illustrates that the top 10% of India’s population controls 57% of the national income, while the bottom 50% holds only 13%. Such disparities highlight the importance of using monetary policy not just as a macroeconomic tool, but as a lever for redistributing opportunities.

Challenges for the RBI

1. Limited Instruments for Targeted Intervention: Unlike fiscal policy, which can directly target specific populations through welfare programs or subsidies, monetary policy operates indirectly. The RBI can adjust interest rates, manage liquidity, or set regulatory standards for financial institutions, but it cannot directly provide income support or job creation measures. This limits its ability to influence equitable growth without collaboration with fiscal authorities.

2. Balancing Inflation and Growth: The RBI’s primary mandate remains inflation control, which sometimes requires policies that can suppress growth or employment, particularly in high-demand sectors. While inflation control benefits all, its trade-offs may disproportionately affect the most vulnerable, who are the first to feel the impacts of slower job creation or wage stagnation.

3. Private Sector Focus: Many of the RBI’s measures, such as capital market interventions and interest rate cuts, tend to benefit the private sector and the wealthier strata that participate in financial markets. Without targeted support for public sector programs aimed at employment and infrastructure in underserved areas, these benefits often fail to trickle down to the broader population.

Complementary Policies for Equitable Growth

For monetary policy to effectively contribute to equitable growth, it needs to be complemented by fiscal policies that target wealth redistribution and financial inclusion. Key areas of focus should include:

Enhanced Credit to SMEs and Rural Areas: The RBI can collaborate with banks to ensure that a greater portion of lending reaches sectors that are crucial for inclusive growth, such as agriculture, rural infrastructure, and small businesses. These areas are labor-intensive and can generate employment for lower-income households.

Digital Financial Inclusion: Expanding the digital financial ecosystem, particularly in rural and underserved areas, could improve access to formal banking, credit, and insurance products. The RBI can play a role by promoting fintech innovations that reach these communities.

Employment and Wage Support: Coordination with fiscal authorities to support employment generation programs, particularly in high-growth and job-intensive sectors like infrastructure and manufacturing, can bridge the gap between monetary policy and equitable growth outcomes.

The RBI’s recent decision to maintain the status quo on monetary policy reflects its careful balancing act between inflation control and economic growth. However, without complementary measures aimed at fostering financial inclusion and reducing income inequality, monetary policy alone cannot drive equitable growth. As India’s economy continues to grow, ensuring that the benefits of this growth are broadly shared will require a more integrated approach, combining fiscal, regulatory, and monetary tools to address the structural inequities in access to opportunities.

This will not only support more sustainable economic development but also ensure that India’s growth story is one of shared prosperity.