MC Explains | What RBI’s 'Accommodative' stance means for interest rates and the economy

Reserve Bank of India

The monetary policy committee (MPC) of the Reserve Bank of India in April monetary policy has decided to change stance from ‘Neutral’ to ‘Accommodative’, to stimulate economy with the lower interest rates, when there are concerns over growth amid global uncertainties.

Usually, accommodative stance entails easy monetary policy that is geared towards stimulating the economy through softer interest rates, RBI Governor Sanjay Malhotra said while announcing the monetary policy decision on April 9.

The central bank, during an accommodative policy period, is willing to cut the interest rates or maintain status quo if required, while supporting the economy. A rate hike is ruled out.

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The central bank typically adopts an accommodative policy when growth needs policy support and inflation is not the immediate concern.

The current domestic economic situation is exactly warranting the ‘Accommodative’ stance, when the growth is likely to get impacted by global cues, but inflation is trending below the RBI’s medium-term target of 4 percent.

The central bank in April monetary policy has reduced the growth projections for the financial year 2025-26 amid global uncertainties.

RBI had also opted for the similar stance during the COVID-19 crisis, when economy needed the support. After that, it opted ‘Withdrawal of Accommodation’ stance, which means more restrictive policy where the RBI aims to reduce the money supply in the economy.

Malhotra said that the stance of monetary policy signals the intended direction of policy rates going forward.

Accordingly, with respect to the policy rate, which is the mandate of the MPC, today’s change in stance from ‘neutral’ to ‘accommodative’ means that going forward, absent any shocks, the MPC is considering only two options – status quo or a rate cut, governor added.

Economists and money market experts said that the current stance and the dovish tone by the RBI in April monetary policy indicate that the central bank may cut rates steeper than what was expected earlier.

“The change in stance and dovish commentary by the governor indicate that MPC has shifted its focus on supporting growth. The change of stance prepares the ground for further rate cuts,” CareEdge said in a report.

Report also added that recent moderation in the dollar index and expectations of more US Federal Reserve rate cuts place the RBI in a better position to undertake further reductions in the policy rate.

Governor Malhotra clarified during the policy that the stance should not be directly associated with liquidity conditions. While liquidity management is important for monetary policy including decisions related to policy rate, it is an operating tool with the RBI for various purposes including monetary policy transmission.

Monetary policy decisions to change policy rates do however have implications for liquidity management, being the operational tool to carry out the policy changes, he added.