Explained: Difference between RBI’s accommodative, neutral & hawkish stance
RBI's accommodative stance indicates that it is willing to cut interest rates
A neutral stance implies that it can either cut or hike interest rates
A hawkish stance indicates that central bank is willing to hike interest rates
The Reserve Bank of India's policy language is difficult to decipher and has a significant impact on financial markets. It gives vital hints about the central bank's policy thinking.
The Monetary Policy Committee (MPC) has finally moved past its extreme accommodative stance, per the latest policy announcement and following remarks by Governor Shaktikanta Das. Let's go through the fundamentals of the RBI's stances.
The central bank's accommodative stance indicates that it is willing to increase the money supply in order to stimulate economic growth. During an accommodative policy phase, the central bank is willing to lower interest rates. The possibility of a rate hike has been ruled out. For the past few years, the Reserve Bank of India (RBI) has maintained an accommodative approach in order to sustain the economy through the COVID-19 crisis. When growth requires policy support but inflation is not an immediate worry, the central bank normally adopts an accommodative policy.
The central bank's 'neutral stance' implies that it can either cut or raise interest rates. When the policy priority is equal to both inflation and growth, this approach is often taken. During a neutral policy, the central bank does not commit to raising or lowering interest rates. Depending on the incoming data, the interest rate can fluctuate on either side. The market can expect rate action in any direction at any time, as per the guidance.
A hawkish stance indicates that keeping inflation low is the central bank's top priority. During this time, the central bank is willing to raise interest rates in order to limit demand by curbing the money supply. A tight monetary policy is also associated with a hawkish stance. During this time, a rate cut is almost inevitable. When the central bank raises interest rates or tightens monetary policy, banks raise interest rates on loans to end borrowers, reducing demand in the financial sector.