As per the definition given on the website of the Reserve Bank of India “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. In this blog, we would take you through the Monetary Policy Stances and help you clear your concepts about them.
- RBI’s Monetary Policy Stances
- RBI Grade B Online Course 2021-22 by Oliveboard
RBI’s Monetary Policy Stances
Before we jump on to understand the nitty-gritty of monetary policy stances, let us first understand what is monetary policy.
» What is Monetary Policy?
1. The process of drafting, announcing & Implementing the plan of actions taken by the Central Bank of a Country (In India, Reserve Bank) that controls the quantity of money in an Economy.
2. Management of money supply and interest rates, aimed at achieving macroeconomic objectives such as controlling inflation, consumption, growth and liquidity.
» What is Stance? – Definition
1. It is a standpoint. Standpoint basically means an attitude to a particular issue or a point of view or perspective/outlook or approach.
2. Monetary Policy Committee of the Reserve Bank of India meets every two months to take key decisions on the Monetary Policy of the Country.
Monetary Policy Committee comes up with the Monetary Policy statement once in every two months also known as Bi-Monthly Monetary Policy Statement in which the Committee decides upon the Key Policy Rates such as Bank Rate, Repo Rate, Reverse Repo Rate, Marginal Standing Facility, Cash Reserve Ratio and Statutory Liquidity Ratio.
3. You must have heard the statement that “MPC decided to change the stance of monetary policy from neutral to accommodative.”
4. 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.
5. There are no strict rules about Monetary Policy rates. We need to understand that not always increasing the Interest Rates to a very high extent is good for the Economy. It cannot be said that always low or high interest rates are good for the Economy. Depending on the performance of the Economy, rates need to be decided and there needs to be balanced.
» Various Monetary Policy Stances
I. Hawkish Monetary Policy Stance
Let’s understand the dictionary meaning first: Resembling a hawk in nature or appearance.
Advocating an aggressive or war-like policy; especially in foreign affairs. The central bank of a country (RBI) wants to guard against excessive inflation.
Meaning in Economic Terms – In order to keep inflation in check, the Hawkish stance favours high-interest rates. Because of the high interest rates, 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.
So, understand that whenever RBI says that the Monetary Policy Stance is Hawkish, it means there would be a rate hike.
Also, an increase in interest rates can cause a strengthening of the country’s currency. When interest rates increase, that will usually cause the value of a currency to rise.
II. Dovish Monetary Policy Stance
Let’s understand the dictionary meaning first: Supporting discussion or other peaceful solutions rather than the use of force.
It can be said more or less the opposite of Hawkish. It is a calmer approach as compared to Hawkish. This stance is taken when the economy is not growing and the government wants to guard against deflation (decrease in the cost of goods and services). There is a need to stimulate the economy.
Meaning in Economic Terms – This monetary policy stance involves low interest rates. Low-Interest Rates would entice consumers to take credit (loans) from Banks and other sources.
Now that people have money in their hands or let’s say money at their disposal, they would start spending more and thereby demand the products and services would rise.
As the demand increases, 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 who recommend Dovish Monetary Policy Stance, typically 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
Let’s go by the dictionary meaning first: Willing to fit in someone’s wishes or needs.
Meaning in Economic Terms – This happens when a central bank (RBI) attempts to expand the overall money supply to boost the economy 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
Let’s go by the dictionary meaning first: Unbiased, not supporting or helping either side in a conflict/ Equilibrium or Neutral rate.
Meaning in Economic Terms – 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.
This was all from us in this blog of “Monetary Policy Stances“. We hope that the concept of Monetary Policy Stances explained here are crystal clear in your minds. You can go through the Video given below that explains the same concepts in a much more interactive manner. She is expert Faculty at Oliveboard.
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