What RBIs shift in MPC stance from neutral to accommodative means
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RBI governor, however, clarified that this change in stance should not be directly linked to liquidity conditions. The monetary policy stance specifically relates to the direction of interest rates, he said. File photo

What RBI's shift in MPC stance from neutral to accommodative means

An accommodative stance focuses on stimulating economy by lowering interest rates, thus encouraging borrowing and investment; it is implemented to boost demand


The Reserve Bank of India (RBI) has shifted its monetary policy stance from neutral to accommodative, signalling a more dovish approach to managing the country’s economy.

In this fiscal’s first monetary policy meeting, the RBI has also decided to cut interest rates by 25 bps to 6.0 per cent in line with market expectations.

The rate cut comes in the backdrop of inflation moving on a downward trajectory at 3.6 per cent in February, which is well within the RBI’s medium-term target of 4 per cent.

Accommodative stance

In his statement, RBI Governor Sanjay Malhotra outlined the implications of this shift, clarifying that the change represents a potential pivot towards easing economic conditions rather than tightening.

An accommodative stance focuses on stimulating the economy by lowering interest rates, thus encouraging borrowing and investment. This is typically implemented during periods of economic slowdown, with the aim of boosting demand and preventing stagnation. Conversely, a tightening stance, which often involves raising rates, seeks to curb inflation and cool down an overheating economy.

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According to Malhotra, a neutral stance, which was previously in place, is one where the central bank neither stimulates the economy nor restrains it. Instead, it offers flexibility for future adjustments based on evolving economic conditions. With this shift, the RBI has essentially placed itself in a position where it can either maintain the current rates or opt for a reduction, depending on how economic indicators unfold.

No link to liquidity conditions

However, Malhotra clarified that this change in stance should not be directly linked to liquidity conditions. While the central bank does use liquidity management tools as part of its broader policy framework, the monetary policy stance specifically relates to the direction of interest rates.

"The policy rate guidance we provide reflects our stance on future economic conditions and monetary policy decisions," Malhotra explained. "But it does not directly offer insights into liquidity management, which is an operational tool used for broader purposes, including policy transmission," he added.

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