Monetary Policy Stance to markets- by RBI


The Central bank of a country (example- RBI in India) undertakes various Monetary Policy stances through the course of change in short term policy actions in order to achieve the targeted short-term economic growth for the country.

Often we have seen Reserve bank of India using ‘jargon’s’ such as- calibrated tightening, accommodative or neutral. These policy stances are mainly policy guidance to financial markets so that all types of investors can make informed decisions. It also comes handy for economists and analysts to think ahead and work on their predictions to give clients a sense of where the interest rate regime is heading.

Calibrated Tightening

The tightening of the monetary policy stance also known as ‘hawkish’  by the monetary policy committee (MPC) and the RBI means that there is a probability of the rate to go high in the future.

An increase in the ‘Repo Rate’ (repo rate is the rate at which central bank of India lends money to the commercial banks) would lead to an increase the overall short term borrowing rates in the country. An increase in the borrowing rates –makes all kinds of borrowing (example- personal loans, mortgages or interest on credit cards) expensive because of the increase in the interest payments. An increase in the interest rates also means an increase in the savings rate which makes depositing money in the money more attractive.

Thus when people can’t borrow money and those who have it prefer to keep it in the bank- the spending capacity of the country gets tightened, with supply for good remaining same in the short run and less people to demand, this also leads to declining prices for the goods.

RBI may also sell treasury bonds in an open market operation with a promise of paying back the money along with interest, thus effectively taking out the liquidity from the market.

Hence, whenever in inflation is on rise and the currency is depreciating, RBI aims at a calibrated tightening policy in order to curb ‘inflation’ and keep ‘Rupee’ it within the target window.



The accommodative monetary policy stance also known as ‘dovish’ by the MPC and the RBI means that there is a probability of a rate cut in the future.

An easing monetary policy leads to a rate cut in ‘Repo Rate’ thus decreasing the overall short term lending rate, and making borrowing attractive. In fact it also leads to decline in the saving rates. As the lower rates makes people to borrow more it also increases the money supply in the market. With the supply of the goods remaining same in the short run and the demand for goods increasing, the price of the commodities tends to increase.

RBI may also resort to buying Treasury Bonds in open market operations, thus inducing liquidity in the market.

RBI resorts to an accommodative stance when there is economic slowdown, GDP is declining or inflation is below the target window of the country. Thus money supply is infused in the market to boost growth.



The neutral monetary policy stance by the MPC  and the RBI means that anything can be possible and the rates can swing in both ways, and will change only when there is compelling data.

Basically, it means monetary policy committee has to be flexible enough to tweak its decisions on the ‘Repo Rate’ as per the incoming data.


A question then may arise is that then why do we need a stance?  Why does RBI need to guide the market in advance if decisions can be taken with the incoming data? Isn’t the ‘neutral stance’ always better?

Well, it’s a way by the government to inform the market that in case of a tightening – the rate may or may not increase, but a rate cut is surely off the table (means borrowing cost may increase in the future and investment may dampen- leading the increased cost, this guidance by the RBI helps the corporate in making a short-term contingency plan)

source: Mospi

source: Mospi

The first chart show the quarter on quarter growth in GDP% and the second chart shows month on month change in Inflation rate%

As per the current state in first Qtr-2019, where we stand today is remarkable: we have consumer price inflation (CPI) of 2.33% in November, much on the lower side by Indian standards. However, the policy rate stance of the RBI MPC is ‘calibrated tightening’ i.e. they would look to gradually hike interest rates.


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