Policy space and stance

Inflation outlook will guide the MPC's actions

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The Reserve Bank of India (RBI) Governor Sanjay Malhotra, in an interview with this newspaper on Tuesday, said that if the inflation outlook turned out to be lower than the RBI's expectations, it would open up policy space.

There was some confusion in the marketplace after the Monetary Policy Committee's (MPC's) latest policy action on June 6 to reduce the policy repo rate by 50 basis points to 5.5 per cent.

The resolution of the committee had noted ". . . under the current circumstances, monetary policy is left with very limited space to support growth".

It also decided to change the stance from "accommodative" to "neutral".

A "neutral" stance essentially means that all options will be on the table.

However, as Mr Malhotra explained in the interview, the change in stance does not mean an immediate reversal in the policy cycle.

It is important to understand the rationale behind the MPC's decision to reduce the policy rate by 50 basis points, as against the market expectation of 25 basis points.