RBI MPC Meet: What Does RBI’s ‘Neutral’ Stance Mean? | Monetary Policy Stance Explained

The Reserve Bank of India (RBI) maintained the repo rate at 6.5% in its October Monetary Policy Committee (MPC) meeting. Moreover, the MPC revised its monetary policy stance from "withdrawal of accommodation" to "neutral." Earlier, the RBI MPC had maintained a ‘withdrawal of accommodation’ stance. RBI Governor ShaktiKanta Das said that the prevailing and expected inflation and growth balance have created congenial conditions for change in monetary policy stance This shift marks a key development in how the central bank views inflation and economic stability. But what does the RBI monetary policy stance mean? Neutral Stance: The RBI's decision to adopt a neutral stance signals that it does not have a strong bias towards either tightening or easing monetary policy in the near term. A neutral stance is a balanced approach, where the central bank perceives that both inflation and growth are relatively stable. Under this policy, future interest rate decisions depend on evolving macroeconomic conditions without any predetermined direction towards either rate hikes or cuts. This allows the RBI to act based on data, keeping inflation under control while fostering growth. The MPC changed its stance in the October policy in sync with geopolitical conditions and global growth challenges. Keeping in view the prevailing inflation and growth condition, the RBI says it remains unambiguously focussed on inflation and the alignment to the MPC targets. Accommodative Stance: An accommodative stance is when the central bank aims to stimulate economic growth, often by lowering interest rates or keeping them low. This is typically used when inflation is under control, but the economy needs a boost, possibly during a slowdown or recession. By making borrowing cheaper, the RBI encourages consumption and investment, which in turn stimulates the economy. Since the pandemic, the RBI has primarily been in an accommodative stance to revive economic activity. However, as inflation surged globally, driven by supply chain disruptions and commodity prices, the RBI began withdrawing this accommodation to prevent overheating of the economy. Hawkish Stance: A hawkish stance or withdrawal of accommodation stance focuses on controlling inflation. Under this approach, the central bank may raise interest rates to curb excess demand in the economy, which could drive up prices. It is typically adopted when inflation is persistently high and threatens economic stability. A hawkish policy stance indicates that the central bank's primary concern is keeping inflation in check, even if it means slowing down economic growth. The RBI’s October decision reflects a cautious yet optimistic approach. By holding the repo rate steady and adopting a neutral stance, the RBI recognises the progress made in taming inflation but remains wary of global uncertainties, especially geopolitical tensions that could affect global growth and domestic price levels. While the central bank expects an easing in food inflation, it remains vigilant against any potential resurgence in inflationary pressures.
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