Banking Central | A case for ‘neutral’ stance

moneycontrol.com:

The monetary policy committee (MPC) will begin its bi-monthly monetary policy meeting (MPC) on February 8. The three-day meet will end on February 10 when Reserve Bank of India (RBI) Governor Shaktikanta Das will announce the outcome of the policy meet. The MPC meet was scheduled during February 7-9, 2022. But, with February 7 being declared a public holiday by the Government of Maharashtra as a mark of respect to Lata Mangeshkar who passed away on February 6, the MPC meeting was rescheduled to February 8-10, 2022.

What should one expect from this round of policy meet? Most economists expect a status quo in key rates but a change in the policy stance from ‘accommodative’ to ‘neutral’ indicating a step towards policy normalisation.  What is ‘accommodative’ and ‘neutral’?  An accommodative stance indicates that the rate-setting panel is willing to cut rates and effectively inject money into the financial system while a ‘neutral’ stance signals the probability is on either side, means the MPC can either cut rate or go for a hike.

Till now, the rate-setting panel is on a prolonged ‘accommodative’ mode. There is an expectation that this will change in the current meet.

If that happens, it will be a significant shift in the rate-setting panel’s approach. The MPC’s prolonged accommodative stance was an attempt to build confidence in the market that the RBI continues to be on a growth-supportive mode. The central bank promised to make sure that the banking system has enough liquidity support to tide through the COVID phase. The MPC clearly stated this approach throughout the first and second covid waves and said while doing so, it will see through the near-term inflationary pressure.

But, data points indicate that things have