Explaining Monetary Policy Stances!

Explaining Monetary Policy Stances!

According to the Reserve Bank of India, "Monetary Policy refers to the use of monetary instruments under the supervision of the central bank to regulate magnitudes such as interest rates, money supply, and credit availability with the ultimate goal of economic policy in mind."


Monetary Policy

Monetary policy is a set of measures that the Reserve Bank of India (RBI) uses to encourage long-term economic growth by regulating the supply of money available to the country's banks, consumers, and enterprises.

The idea is to keep the economy moving at a steady pace that is neither too fast nor too slow. The RBI may increase borrowing interest rates to discourage spending or decrease borrowing interest rates to encourage borrowing and spending.

The nation's money is the major weapon at its disposal. The rate at which the RBI lends money to the country's banks is determined by the RBI itself. All financial institutions adjust the rates they charge from their customers when RBI increases or decreases their rates. From large enterprises borrowing for major projects to home buyers seeking mortgages, this affects everyone.


Different Stances of RBI

It is a perspective of view. The term "Stance" in economics refers to a person's attitude toward a certain subject, as well as a point of view, viewpoint, outlook, or approach. The Monetary Policy Committee of The Reserve Bank of India holds a meeting every two months to make critical decisions about the country's monetary policy.

The Monetary Policy Committee issues a statement every two months, in which the committee decides on the Key Policy Rates such as the Bank Rate, Repo Rate, Reverse Repo Rate, Marginal Standing Facility, Cash Reserve Ratio, and Statutory Liquidity Ratio.


Various Monetary Policy Stances

What is Accommodative Stance?

An accommodative stance means when the RBI tries to boost economic growth by expanding the general money supply. The main goal is to boost spending.

The purpose of accommodating monetary policy is to allow the money supply to rise in tandem with national income and money demand. This is sometimes referred to as "loose monetary policy".

When the economy slows down, the central bank (RBI) can take an accommodative stance on monetary policy to help the economy recover. Central bank accomplishes this by lowering interest rates hence making the cost of borrowing cheaper. The purpose of accommodating money policy is to encourage consumers and businesses to spend more by making money more affordable to borrow by lowering short-term interest rates.

What is Neutral Stance?

Let’s go by the word itself, Neutral means not supporting either side in a conflict or disagreement. Therefore, Neutral Stance was taken by the central bank when the economic condition was just right. In Neutral Stance, the central bank neither cut down nor hike interest rate.

What is Hawkish Stance?

Hawkish Stance is taken by the central bank in order to keep inflation low. In this phase, the central bank increases the interest rate which makes borrowing less affordable. Due to the high- interest rate consumer will be hesitant towards taking loans, which will lead to lesser consumer spending which will further lead to low demand for goods and services. As a result of low demand prices of goods and services will tend to stabilize.

So, in simple words, whenever the central bank states that Monetary Policy Stance is Hawkish, it means there would be an interest rate hike.


What is Dovish Stance?

Dovish Stance is somewhat opposite of hawkish stance. This Stance is taken by the central bank when economy is not growing and government wants to keep a check on deflation.

When the central bank takes a dovish stance on monetary policy, they lower the interest rate which makes loans/borrowings more attractive which lead to more money in hands of people.

The people then would start spending money on goods and services which will increase demand in the market and that will lead to an increase/rise in prices of goods and services. And we all know that increase in the price of goods and services causes inflation. (Inflation is not always harmful to the Economy. In fact, government sometimes deliberately infuses money into the economy which triggers economic growth)

Few economists also believe that a decrease in the rate of interest also leads to an increase in the rate of employment.


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