NEWS

According to a recent statement issued by RBI, Financial Inclusion has helped monetary policy transmission in India

DETAILS

• Involving people in the monetary policy process and promoting financial inclusion has helped RBI improve policy transmission
• Financial inclusion is found to improve the transmission of interest rate-based monetary policy impulses in two ways. First, the financially excluded would typically prefer cash savings. But as inclusion increases, their preference shifts from cash to interest-bearing bank deposits and other financial assets. Consequently, financial savings turn more sensitive to interest rates.
• Second, financial inclusion is expected to expand the access to bank credit, which is interest sensitive and affected by changes in the policy rate. Hence financial inclusion enhances the potency of interest-rate based monetary policy by causing an increasing number of people to become responsive to interest rate cycles.
• Observing that financial inclusion appeared to have increased, with the level of the RBI’s financial inclusion index rising from 49.9 in March 2019, to 53.1 in March 2020, and further to 53.9 in March 2021
• Financial inclusion appeared to be the lowest in rural, agriculture-dependent areas where food was the main source of income.
• Efficacy of monetary policy in achieving its stabilisation objective increases by targeting a measure of prices that includes food prices rather than one that excludes them such as core inflation
• In India, food accounts for 46% of the CPI, among the highest shares globally
• The lower the level of financial inclusion, therefore, the stronger is the case for price stability being defined in terms of headline inflation rather than any measure of core inflation that strips out food and fuel

MAHITI FOR PRELIMS

• Financial Inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way
• Monetary policy is adopted by the monetary authority of a country that controls either the interest rate payable on very short-term borrowing or the money supply.