Optimize IAS
  • Home
  • About Us
  • Free Initiatives
    • Daily Practice Sheets
    • Daily Prelims Notes
    • Prelims Power Play
    • Mains Factly
    • Sunday Essay Sadhna
  • Courses
    • Mains Master Notes
    • Prelims Test Series
      • Laqshya 2024
    • Integrated Guidance 2024
      • ARJUNA PRIME 2024
    • Daily Answer Writing
  • Downloads
    • Important Topics List for Prelims 2023
    • Daily Prelims Notes Compilation
    • Daily Practice Sheet Compilation
    • PPP Compilation
    • PSIR Notes
    • General Studies Notes
    • UPSC Mains Previous Year Papers
  • Portal Login
  • Home
  • About Us
  • Free Initiatives
    • Daily Practice Sheets
    • Daily Prelims Notes
    • Prelims Power Play
    • Mains Factly
    • Sunday Essay Sadhna
  • Courses
    • Mains Master Notes
    • Prelims Test Series
      • Laqshya 2024
    • Integrated Guidance 2024
      • ARJUNA PRIME 2024
    • Daily Answer Writing
  • Downloads
    • Important Topics List for Prelims 2023
    • Daily Prelims Notes Compilation
    • Daily Practice Sheet Compilation
    • PPP Compilation
    • PSIR Notes
    • General Studies Notes
    • UPSC Mains Previous Year Papers
  • Portal Login

Impossible Trilemma

  • September 16, 2020
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
No Comments
Print Friendly, PDF & Email

Subject: Economy

Context:

In a recently released report, the Reserve Bank of India mentioned that an appreciating currency will help contain imported inflationary pressures. This has given rise to a fervent debate as to whether the RBI is no longer able to handle the Impossible Trilemma. 

Concept:

  • The policy trilemma refers to the trade-offs a government faces when deciding international monetary policy. In particular, the policy trilemma contends that it is not possible to have all three objectives at the same time, but has to choose two from the following three options:
    • Free movement of capital
    • Independent (autonomous) monetary policy
    • Fixed (managed) exchange rates

  • The Impossible Trilemma, an important paradigm of open economy macroeconomics, asserts that a country may not be able to stabilise the exchange rate, and conduct an independent monetary policy when it is financially integrated with the rest of the world.
  • Policymakers in all sophisticated economies face this trilemma, forcing them to make choices about which targets they are going to pursue.
  • The RBI has tried to avoid these choices: It has tried to pursue all three objectives simultaneously in an especially aggressive manner since the pandemic struck.
    • It has reduced its policy interest rate to negative levels in real terms.
    • It has bought government securities to push down long-term interest rates.
    • It has allowed large capital inflows, then intervened in the foreign exchange market to prevent the appreciation of the rupee. These actions are incompatible, and will eventually generate a serious policy dilemma.
  • One of the corners of the trilemma has to do with capital inflows. In the first few months of the pandemic and the associated lockdown, the Indian economy witnessed a net outflow of foreign portfolio investment (FPI). However, this trend has reversed in recent months.
  • At the same time, the combination of weak economic growth, lacklustre domestic demand, and low oil prices have shifted the current account balance from deficit into surplus. Imports have fallen more than exports suggesting that India is doing worse than its trading partners. These factors have changed the balance of supply and demand in the foreign exchange markets as a result of which the currency has begun to face appreciation pressures against the dollar. This brings us to another corner of the trilemma — currency stability.
  • Retail inflation has now breached the upper limit of 6 per cent for more than three quarters. Core inflation has been rising and inflation expectations have jumped sharply. And while credit to the private sector remains depressed, credit to the government has been strong, implying that overall broad money is growing rapidly.
economy Impossible Trilemma
Print Friendly, PDF & Email

Recent Posts

  • Daily Prelims Notes 1 October 2023 October 1, 2023
  • News-Jewar Airport, Noida get DXN code October 1, 2023
  • Effect of Invasive plants October 1, 2023
  • Need for creation of Global dispute settlement October 1, 2023
  • Kazan Meet October 1, 2023
  • How Important is the first asteroid sample October 1, 2023
  • Granules India gets USFDA’s nod for hypertension generic October 1, 2023
  • Genes fuel antibiotic resistance in Yemen cholera epidemic October 1, 2023
  • Aditya L1 escape earth influence October 1, 2023
  • Why BSL3 lab for Nipah confirmation is unnecessary October 1, 2023

About

If IAS is your destination, begin your journey with Optimize IAS.

Hi There, I am Santosh I have the unique distinction of clearing all 6 UPSC CSE Prelims with huge margins.

I mastered the art of clearing UPSC CSE Prelims and in the process devised an unbeatable strategy to ace Prelims which many students struggle to do.

Free Initiatives

  • Daily Practice Sheets
  • Daily Prelims Notes
  • Mains Factly
  • Prelims Power Play
  • Sunday Essay Sadhna

My Proven Strategy

  • Interview Strategy
  • Mains Strategy
  • Motivational
  • Prelims Strategy

Contact us

moc.saiezimitpo@tcatnoc

For More Details

Work with Us

Connect With Me

Santosh Pandey Quora Santosh Sir Telegram Santosh Sir Youtube Optimize IAS Instagram

Course Portal
Search