New Stoy : As RBI takes a 'neutralhat do its monetary policy stances mean?

The Reserve Bank of India, in its 51st Monetary Policy meeting, announced a shift of stance from withdrawal of accommodation to 'neutral', signalling an upcoming interest rate change

As the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) decided to keep the repo rate unchanged at 6.5 per cent on Wednesday (October 9), governor Shaktikanta Das announced that the RBI is shifting its stance from ‘withdrawal of accommodation’ to  ‘neutral’. But what do these stances of the RBI mean?

 

 

Meaning of RBI’s ‘neutral’ stance

 

A neutral stance indicates that the RBI maintains flexibility in adjusting policy rates based on prevailing economic conditions. This means that the central bank is open to either increasing or decreasing interest rates, depending on data related to inflation and economic growth. The neutral stance is generally adopted when both inflation control and economic growth are given equal priority, allowing for adjustments in either direction as new information arises.

 

 

It maintains a balanced focus, placing equal weightage on managing inflation while also supporting economic growth. Additionally, the RBI provides market guidance, signalling that rate changes could occur depending on incoming data, ensuring transparency and responsiveness to economic conditions.

 

What’s ‘withdrawal of accommodation’?

 

In contrast, a withdrawal of accommodation refers to a more restrictive monetary policy stance where the RBI aims to reduce the money supply in the economy. This involves increasing interest rates to curb inflationary pressures. When the RBI withdraws accommodation, it signals that it is less inclined to support economic growth through lower rates, focusing instead on stabilising prices.

 

This policy is aimed at tightening the monetary policy to reduce liquidity in the economy. It prioritises keeping inflation within the target levels and indicates a shift away from policies that encourage borrowing and spending.

 

What’s RBI’s ‘accommodative’ stance?  

 

An accommodative stance refers to a monetary policy approach where the central bank is inclined to increase the money supply to stimulate economic growth. This typically involves reducing interest rates, with no prospect of a rate increase. For the past two years, the Reserve Bank of India has maintained an accommodative stance to support the economy, particularly during the Covid-19 pandemic. Central banks usually adopt this approach when economic growth requires support and inflation is not a pressing issue.

 

What is a ‘hawkish’ stance of the RBI?  

 

A hawkish stance reflects the central bank’s focus on controlling inflation. During such periods, the central bank is likely to raise interest rates to limit the money supply and dampen demand. This signals a tight monetary policy approach. In this phase, interest rate cuts are almost out of the question.  When the central bank raises rates or tightens its monetary policy, commercial banks follow suit by increasing loan interest rates, which helps reduce demand in the financial system.

 

What does ‘calibrated tightening’ mean?  

 

Another commonly used term is ‘calibrated tightening’. This indicates that while rate cuts are not being considered in the current policy cycle, any rate increases will be gradual and measured.  The central bank might not opt for a rate hike in every policy meeting, but its stance leans towards tightening.xsdsdsdsds  sasasa  Rate adjustments can also occur outside scheduled policy meetings if necessary.

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