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Economy and Finance

Withdrawal of Accommodation in Monetary policy

11 Feb 2024 Zinkpot 351
Withdrawal of Accommodation in Monetary policy
  1. The Reserve Bank of India (RBI) has recently adjusted its stance regarding monetary policy. Instead of the earlier “to remain accommodative” stance, the new stance is "withdrawal of accommodation". Let’s break down what this means:
    • Accommodation Stance: The previous stance was to remain accommodative, which meant that the RBI was willing to keep interest rates low and provide ample liquidity to support economic growth. This accommodative stance aimed to stimulate borrowing, spending, and investment.
    • Withdrawal of Accommodation Stance: The current stance emphasizes a shift away from accommodative policies. It implies that there is less scope for further rate cuts by the RBI. If inflation persists, there could be more rate hikes in the future. Essentially, the RBI is signaling a move towards normalizing monetary conditions.
  2. Impact: With this change, expectations of higher interest rates have increased. Bond yields may rise due to reduced demand for bonds. The RBI aims to balance inflation control with supporting economic growth.
  3. The Reserve Bank of India’s Monetary Policy Committee has also decided to keep the policy repo rate unchanged at 6.5%.  The six-member committee voted by a 5:1 majority to keep the repo rate unchanged in its last meeting of FY24 as retail inflation continues to be above its target of 4%. This is the sixth meeting on the trot that the MPC has maintained a status quo on the repo rate.
  4. What is the Repo Rate? The repo rate is set by a country’s central bank (such as the RBI in India). It represents the rate at which commercial banks borrow money from the central bank. When the central bank wants to influence the economy, it adjusts the repo rate.
  5. How are repo rate and inflation related? 
    • High Inflation: When inflation (the general increase in prices of goods and services) is high or rising, central banks typically raise the repo rate. By increasing the repo rate, the central bank makes borrowing more expensive for both consumers and businesses. This discourages excessive spending and borrowing, which can contribute to inflation.
    • Low Inflation: Conversely, when inflation is low, the central bank may lower the repo rate. Lowering the repo rate encourages borrowing and spending, stimulating economic activity. It also makes loans more affordable, encouraging investment and consumption.
  6. In summary, the RBI’s new stance reflects a cautious approach, considering both inflation and growth dynamics. The central bank remains vigilant and adaptable in these uncertain times.
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