Types of Monetary Policy

1.Contractionary Monetary Policy

• It is also called dear money policy or tight money policy.
• RBI increases the interest rates to decrease money supply in the economy and hence bring inflation.

2. Expansionary Monetary Policy

• It is also called easy money policy or cheap money policy. Here RBI decreases the interest rates, to increase the supply of money in the market and hence bring the economy out of recession or slowdown.
• But this policy has risks associated with it like bringing huge inflation. Also, there is a time lag between the time when policy is announced and when it takes effect in the economy.
• Expansionary monetary policy may not have desired impact on the economy in terms of growth.

Monetary Policy Stances

Monetary Policy stance tells us what RBI will be doing with interest rates in the future; will it increase  them or decrease  them or will they remain unchanged.

Various Monetary Policy Stances are:

1. Hawkish Monetary Policy Stance

• To keep inflation in check, Hawkish stance favours high-interest rates.
• Because of the high-interest rates, borrowing will become less attractive.
• Due to high IR, consumers would not purchase or purchase less and also would stay away from taking credit from banks.
• This would lead to low domestic demand for goods & services. As a result of low demand, prices of goods & services would tend to stabilize.
• This would prevent inflation.
• Also, an increase in interest rates can cause strengthening in the country’s currency. When interest rates increase, that will usually cause the value of a currency to appreciate.

2. Dovish Monetary Policy Stance

• This stance is taken when the economy is not growing and the government wants to guard against deflation and when there is a need to stimulate the economy.
• This monetary policy stance involves low-interest rates.
• Low-Interest Rates would entice consumers to take more loans from banks and other sources.
• Now that people have money in their hands, they would start spending more and thereby demand for the products and services would rise and it will increase economic growth.
• As the demand increases, the prices of goods & services would rise/increase.
• This stance might also lead to a possible weakening of the country’s currency.

3. Neutral Monetary Policy Stance

• The key policy rates can either be increased or decreased or can remain same.
• It is followed when economic conditions are just right.
• A ‘neutral stance’ suggests that the central bank can either cut rate or increase rate.
• This stance is typically adopted when the policy priority is equal on both inflation and growth.
• During neutral policy, the central bank doesn’t commit to hike rates or cut.

4. Calibrated Tightening

• Here interest rates are either increased or they remain unchanged.
• There won’t be any decrease in interest rates.
• This means the central bank may not go for a rate increase in every policy meeting but the overall policy stance is tilted towards a rate hike.

5. Accommodative Stance

• An accommodative stance means the central bank is prepared to expand the money supply to boost economic growth.
• The central bank, during an accommodative policy period, is willing to cut the interest rates. A rate hike is ruled out.
• Accommodative monetary policy is implemented to allow the money supply to rise in line with national income and the demand for money. This is also known as “easy monetary policy”.
• When the economy slows down, the central bank (RBI) can implement an Accommodative Monetary Policy to stimulate the economy.
• It does this by running a succession of decreases in the Interest rates, making the cost of borrowing cheaper.
• Accommodative money policy is triggered to encourage more spending from consumers and businesses by making money less expensive to borrow through the lowering of short-term interest rates.