Withdrawal of Accommodation

'Withdrawal of Accommodation' refers to the RBI gradually reducing monetary easing measures implemented to support economic growth. It's important because it signifies a shift in focus towards controlling inflation after a period of stimulating the economy.

In practice, the RBI uses tools like increasing the repo rate, conducting reverse repo auctions, and adjusting the Cash Reserve Ratio (CRR) to reduce the money supply and increase borrowing costs. This helps to curb inflation.

• •Increasing the repo rate makes it more expensive for banks to borrow money.
• •Reverse repo auctions absorb excess liquidity from the banking system.
• •Adjusting the CRR requires banks to hold a higher percentage of deposits with the RBI, reducing the amount of money available for lending.

The key provisions include:

• •Controlling inflation and maintaining price stability (targeting 4% with a +/- 2% tolerance band).
• •Using tools like repo rate, reverse repo auctions, and CRR adjustments.
• •Decisions made by the Monetary Policy Committee (MPC).
• •Considering GDP growth, inflation expectations, and global economic conditions.

The MPC, consisting of six members, decides on the appropriate level of accommodation and the timing of its withdrawal. They base their decisions on economic data and forecasts, considering factors like GDP growth and inflation.

A key challenge is balancing the need to control inflation with the risk of slowing economic growth. Aggressive implementation can increase borrowing costs and reduce investment.

The Reserve Bank of India Act, 1934 governs monetary policy. Section 49 empowers the RBI to regulate monetary policy, and Section 45ZB constitutes the Monetary Policy Committee (MPC).

'Withdrawal of Accommodation' can increase borrowing costs for businesses and consumers, potentially leading to slower economic growth. Higher interest rates can reduce investment and spending.

It is a key tool for controlling inflation. By reducing the money supply and increasing borrowing costs, the RBI aims to curb inflationary pressures and maintain price stability.

The RBI began its 'Withdrawal of Accommodation' stance in 2022 in response to rising inflation. The RBI has been gradually increasing the repo rate in multiple MPC meetings throughout 2022, 2023 and 2024.

The appropriate pace of withdrawal requires balancing the need to control inflation with the risk of slowing economic growth. A gradual approach may be preferred to avoid shocks to the economy.

A common misconception is that it always leads to a recession. While it can slow economic growth, it is primarily aimed at preventing runaway inflation, which can be more damaging in the long run.

Frequently asked aspects include the definition, objectives, tools used by the RBI, the role of the MPC, and the impact on inflation and economic growth. Questions can be factual or analytical.