In News:

In its latest Monetary Policy Committee (MPC) meeting, the RBI decided to retain the accommodative stance amid signs of moderating inflation and sluggish economic growth. This was intended to support the ongoing recovery and ensure credit availability in key sectors.

Definition:

An accommodative stance is a monetary policy approach adopted by central banks, such as the Reserve Bank of India (RBI), to stimulate economic activity. It generally involves:

• Keeping interest rates low
• Injecting liquidity into the financial system

This stance signals that the central bank is open to reducing rates further or maintaining low rates for an extended period to support growth and demand.

When is it Adopted?

The RBI typically adopts an accommodative stance during:

• Slowing or below-potential economic growth
• Low or stable inflation within the RBI’s target range
• Need to revive consumption, investment, and employment
• Response to domestic or global financial shocks and uncertainties

Objectives

The main aims of an accommodative stance include:

• Boosting credit flow and private investment
• Encouraging borrowing and spending
• Supporting aggregate demand revival
• Providing liquidity relief to stressed sectors
• Promoting employment generation

Key Monetary Tools Used by RBI

To implement an accommodative stance, the RBI uses several instruments:

• Repo Rate Reduction:
  • Lowers the cost of borrowing for commercial banks.
  • Encourages banks to lend more to businesses and consumers.
• Open Market Operations (OMOs):RBI buys government securities to infuse liquidity into the market.
• Long-Term Repo Operations (LTROs):Provides long-term funding to banks at low interest rates.
• Cash Reserve Ratio (CRR) Adjustments:Temporarily lowering CRR increases the funds available for lending.
• Moral Suasion & Regulatory Forbearance:RBI encourages banks to maintain or enhance credit flow, especially to priority and stressed sectors.