Withdrawal of Accommodation

  • July 14, 2024
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Withdrawal of Accommodation

Sub: Eco

Sec: Monetary Policy

Why in news?

State Bank of India’s economic research department said RBI will revisit its “withdrawal of accommodation” policy stance around September 2024, in line with its expectations.

What does it mean?

  • An accommodative stance means the central bank is prepared to expand the money supply to boost economic growth.
  • Withdrawal of accommodation means reducing the money supply in the systemwhich will rein in inflation.
  • RBI has maintained a withdrawal of accommodation stance since June 2022, to ensure that inflation remains within target, going forward, while supporting growth.
  • Correspondingly, repo rate has been kept unchanged at 6.5%.

Change in stance

  • RBI has maintained its stance of “to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth” in June 2024.
  • Decline in US inflation, creates ground for Fed rate cut by September 2024. This is expected to make RBI rethink its stance.

Expansionary vs Contractionary Monetary Policy

ExpansionaryContractionary
GoalTo stimulate economic growth and increase aggregate demand.Aims to slow down the economy and control inflation.
Interest rateInterest rate is lowered to make borrowing affordable, which encourages spending and investmentRaising interest rate to make borrowing more expensive, to discourage spending.
Impact on inflationPotentially lead to higher inflation.Control inflation by reducing money supply.
Employed duringEconomic slowdown or recessionPeriods of high inflation
Also calledLoose money policyTight money policy
economy Withdrawal of Accommodation