Accommodative Stance

Source: DH

Context: The Reserve Bank of India (RBI), in its latest Monetary Policy Committee (MPC) meeting, retained its accommodative stance to support economic recovery amidst moderating inflation and sluggish growth signals.

About Accommodative Stance:

• What is an Accommodative Stance? An accommodative stance is a monetary policy approach adopted by central banks like the RBI to stimulate economic activity. It generally involves keeping interest rates low and ensuring ample liquidity in the system.

• An accommodative stance is a monetary policy approach adopted by central banks like the RBI to stimulate economic activity. It generally involves keeping interest rates low and ensuring ample liquidity in the system.

• When is it Adopted?

• When economic growth slows or is below potential. When inflation is low or within target range. During periods needing boosts in consumption, investment, and employment. In response to financial shocks or global economic uncertainties.

• When economic growth slows or is below potential.

• When inflation is low or within target range.

• During periods needing boosts in consumption, investment, and employment.

• In response to financial shocks or global economic uncertainties.

• Objectives of the Accommodative Stance:

• Promote credit flow and private investment. Encourage borrowing and spending by lowering the cost of capital. Revive demand in the economy. Ensure liquidity support to stressed sectors.

• Promote credit flow and private investment.

• Encourage borrowing and spending by lowering the cost of capital.

• Revive demand in the economy.

• Ensure liquidity support to stressed sectors.

• Tools Used by RBI under Accommodative Stance:

• Reducing Repo Rate: Lowers borrowing cost for commercial banks. Open Market Operations (OMOs): RBI purchases government securities to inject liquidity. Long-Term Repo Operations (LTROs): Provide longer-term liquidity at low rates. Cash Reserve Ratio (CRR) adjustments: Temporarily reduce CRR to enhance bank liquidity. Moral Suasion & Regulatory Forbearance: RBI nudges banks to increase lending.

• Reducing Repo Rate: Lowers borrowing cost for commercial banks.

• Open Market Operations (OMOs): RBI purchases government securities to inject liquidity.

• Long-Term Repo Operations (LTROs): Provide longer-term liquidity at low rates.

• Cash Reserve Ratio (CRR) adjustments: Temporarily reduce CRR to enhance bank liquidity.

• Moral Suasion & Regulatory Forbearance: RBI nudges banks to increase lending.

• Implications on the Indian Economy:

• Boosts consumption and investment, driving GDP growth. Reduces interest burden on borrowers. May lead to asset price inflation if excess liquidity persists. If prolonged, it may fuel inflationary pressures and weaken the rupee. Supports employment generation in the short term.

• Boosts consumption and investment, driving GDP growth.

• Reduces interest burden on borrowers.

• May lead to asset price inflation if excess liquidity persists.

• If prolonged, it may fuel inflationary pressures and weaken the rupee.

• Supports employment generation in the short term.