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Policy Stance of RBI

  • August 2, 2021
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Policy Stance of RBI

Subject: Economy

Context: The Monetary Policy Committee (MPC) is seen unanimously voting to continue status quo on the policy repo rate as a solid increase in aggregate demand is yet to take shape even as the retail inflation print in May and June was above its upper tolerance level.

Concept:

  • Policy Stance is a standpoint. Standpoint basically means an attitude to a particular issue or a point of view or perspective/outlook or approach.
  • Monetary Policy Stances are namely Dovish, Hawkish, Accommodative & Neutral, so that now for the upcoming RBI’s Monetary Policy Statements, you could well comprehend the meaning of these Monetary Policy Stances.

Various Monetary Policy Stances

I. Hawkish Monetary Policy Stance

  • In order to keep inflation in check, the Hawkish stance favours high-interest rates. Because of the high interest rates, the borrowing (taking loans from banks) will become less attractive.
  • Due to the dearth of money, consumers would not purchase or purchase less and also would stay away from taking credit (loans) from banks.
  • This would lead to low domestic demand for Goods & Services. As a result of low demand, prices of Goods & Services would tend to stabilise. This would prevent inflation. This is a complete circle.
  • Also, an increase in interest rates can cause a strengthening of the country’s currency.

II. Dovish Monetary Policy Stance

  • This monetary policy stance involves low interest rates. Low-Interest Rates would entice consumers to take credit (loans) from Banks and other sources.
  • As the demand increases (due to increase in money supply owing to the low rate), the prices of Goods & Services would rise/increase. And we all know that general rise in prices of Goods & Services is called Inflation. Inflation will cause to balance Economic Growth. (Inflation is not always harmful to the Economy, it is needed to trigger economic growth).
  • Economists believe that lower interest rates will lead to a hike in employment and an increase in Economic Growth.
  • This stance might also lead to a possible weakening of the country’s currency.

III. Accommodative Monetary Policy Stance

  • This happens when the economic growth is slowing down. The major aim is to increase spending.
  • Accommodative monetary policy is implemented to allow the money supply to rise in line with national income and the demand for money. This is also known as “easy monetary policy”.
  • When the economy slows down, the central bank (RBI) can implement an Accommodative Monetary Policy to stimulate the economy. It does this by running a succession of decreases in the Interest rates, making the cost of borrowing cheaper. Accommodative money 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.

IV. Neutral Monetary Policy Stance

  • The policy rates neither stimulates (speed up) nor restrains (slowdown) the economic growth by taxation and government spending.
  • Economic conditions are just right. The Key Policy Rates are neither increased nor decreased.

Monetary policy

  • Monetary policy refers to the use of monetary instruments under the control of the central bank to regulate magnitudes such as interest rates, money supply and availability of credit with a view to achieving the ultimate objective of economic policy
  • The Monetary Policy Committee (MPC) constituted by the Central Government under Section 45ZB of RBI Act determines the policy interest rate required to achieve the inflation target.
  • Accordingly, the Central Government in September 2016 constituted the MPC as under Governor of the Reserve Bank of India – Chairperson, ex officio;
  • The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth.
  • In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework.
  • The amended RBI Act also provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once in every five years.
  • Accordingly, the Central Government has notified in the Official Gazette 4 per cent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016 to March 31, 2021 with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent.
  • The MPC is required to meet at least four times in a year.
  • The composition of the MPC is as follows;
    • Governor of the Reserve Bank of India – Chairperson, ex officio;
    • Deputy Governor of the Reserve Bank of India, in charge of Monetary Policy –
      (Member, ex officio)
    • One officer of the Reserve Bank of India to be nominated by the Central Board – Member, ex officio;
    • Except ex-officio members, three independent members will hold the office for a period of 4 years or until further orders, whichever is earlier.
  • The quorum for the meeting of the MPC is four members. Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote.
economy Policy Stance of RBI

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