ACCOMODATIVE MONETARY POLICY

ACCOMODATIVE MONETARY POLICY

Subject : Economics

Context : The Reserve Bank of India (RBI) on Friday said it would retain an accommodative policy stance into the next financial year to help revive growth on a durable basis.

Concept :

• Accommodative monetary policy, also known as loose credit or easy monetary policy, occurs when a central bank attempts to expand the overall money supply to boost the economy when growth is slowing (as measured by GDP).
• The policy is implemented to allow the money supply to rise in line with national income and the demand for money.
• Accommodative monetary policy is triggered to encourage more spending from consumers and businesses by making money less expensive to borrow through the lowering of short-term interest rates.
• When money is easily accessible through banks, the money supply in the economy increases. This leads to increased spending.
• When businesses can easily borrow money, they have more funds to expand operations and hire more workers, which means that the unemployment rate will decrease.
• On the other hand, people and businesses tend to save less when the economy is stimulated due to the low savings interest rates offered by banks.