RBI Monetary Policy Review
The Reserve Bank of India (RBI) has announced the second bi-monthly monetary policy statement for 2019-20. The key decisions reflected in the Monetary Policy statement are:
- Repo rate reduced to 5.75 per cent from the current 6per cent.
- Similarly, the reverse repo rate under the Liquidity Adjustment Facility (LAF) stands adjusted to 5.5% and the marginal standing facility (MSF) rate and the Bank Rate to 6.0%.
- Cash reserve ratio (CRR) remains unchanged at 4%
- All 6 MPC (monetary policy committee) members unanimously voted in the favour of reducing the policy repo rate and change the stance of monetary policy from neutral to accommodative
- GDP growth rate for 2019-20 is revised downwards to 7% (7.2% in the April policy) in the range of 6.4-6.7% for H1:2019-20 and 7.2-7.5% for H2 with risks evenly balanced.
Monetary Policy: Types
Accommodative Monetary Policy
Through the accommodative monetary policy, the Central Bank seeks to stimulate economic growth by loosening the money supply. The accommodative monetary policy is typically characterized by a succession of decreases in the interest rate which makes money easier for business to borrow.
Neutral Monetary Policy
Under the Neutral Monetary Policy, the monetary policy of the central bank neither stimulates nor restrains economic growth.
Tight Monetary Policy
Through the tight monetary policy, the Central Bank seeks to restrict the money supply in an economy by tightening of credit qualifications, soaking up cash by selling government bonds, and/or raising the banks’ reserve requirements.
Tight Monetary Policy is adopted by the central bank to slow down overheated economic growth, to constrict spending in an economy that is seen to be accelerating too quickly or to curb inflation when it is rising too fast.
