Why in the News?
On October 9th, 2024, the RBI's Monetary Policy Committee, led by Governor Shaktikanta Das, kept the repo rate unchanged at 6.5%. The RBI also shifted its stance from withdrawal of accommodation to a neutral approach, signaling greater flexibility in future policy actions.
- Significance of the Shift from Withdrawal to Neutral
- Inflation Under Control: The RBI may have observed that inflationary pressures are moderating, reducing the need for aggressive tightening.
- Supporting Growth: A neutral stance allows the RBI to support economic growth if needed without being constrained by a tightening bias.
- Data Dependency: Emphasizes that future policy decisions will be based on economic data rather than a predetermined course.
| Monetary Policy Stance |
Description |
| Hawkish Monetary Policy Stance |
- A hawkish stance promotes high-interest rates to control inflation.
- High rates make borrowing less appealing, leading to reduced consumer spending and credit uptake.
- Stabilizes prices and helps prevent inflation.
- Higher interest rates can strengthen the national currency.
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| Dovish Monetary Policy Stance |
- This approach favours low-interest rates, encouraging consumers to take loans.
- Increased demand from the greater money supply can lead to rising prices, known as inflation.
- While inflation can support economic growth, lower interest rates are believed to enhance employment and overall growth.
- May weaken the country's currency (Depreciation of currency).
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| Accommodative Monetary Policy Stance |
- It is used during economic slowdowns.
- This policy aims to boost spending.
- It allows for an increase in the money supply in line with national income.
- The central bank may lower interest rates to make borrowing cheaper, thereby encouraging consumer and business spending.
- This is often referred to as “easy monetary policy.”
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| Neutral Monetary Policy Stance |
- In this stance, policy rates are adjusted neither to stimulate nor to restrain economic growth.
- The economic conditions are balanced, with key policy rates remaining unchanged.
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Why These Stances Matter
- For Borrowers and Investors:
- Loan Rates: Interest rates on loans may stabilize or become more predictable.
- Investment Decisions: Investors can make more informed decisions based on anticipated monetary policy moves.
- For the Economy:
- Inflation Control: Helps keep inflation within the target range, maintaining the purchasing power of the currency.
- Economic Growth: A neutral stance can support sustainable economic growth by avoiding unnecessary tightening.
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Money Supply Measures
- M1= Currency held by the public + ‘net’ demand deposits held by commercial banks.
- Net implies that only deposits of the public held by the banks are to be included in the money supply.
- The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded as part of the money supply.
- M2= M1 + Savings deposits with Post Office savings banks
- M3= M1 + Net time deposits of commercial banks
- M4 = M3 + Total deposits with Post Office savings organizations (excluding National Savings Certificates)
- Narrow Money: M1 and M2
- Broad Money: M3 and M4.
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