What Is 'Dovish' Monetary Policy

While stock markets often anticipate the action on the repo rate, they often discount the immediate policy action. On Tuesday, everyone expected the RBI to keep repo rates unchanged. However, you may have noticed analysts call the policy 'dovish'

Here are pointers that could explain the policy stance:

• Policy Stance:

The RBI did not touch key rates looking at existing macro-economic indicators like retail inflation. Measured by the consumer price index (CPI), retail inflation increased for the second consecutive month in April 2014. It was pushed up by a sharp spike in the food inflation, especially in the prices of fruits, vegetables, sugar, pulses and milk. "CPI inflation excluding food and fuel has moderated gradually since September 2013 although it is still elevated," RBI said. For RBI, inflation is the biggest enemy. As long as it stays high, it will not change interest rates. However, the policy is said to be dovish if the RBI sees an easing of the inflationary pressure going forward in its commentary. The outlook projected by RBI in every policy statement makes it dovish or hawkish.

• RBI Outlook:

"If the economy stays on this course, further policy tightening will not be warranted. On the other hand, if disinflation, adjusting for base effects, is faster than currently anticipated, it will provide headroom for an easing of the policy stance," RBI says on the policy rate outlook in its statement. This really means that RBI is willing to look at cutting rates if right steps are taken to ease inflation. This indicates a 'dovish' stand. There are several factors that go into determining this other than inflation. Oil prices are stable, the rupee has appreciated and the new government has talked of fiscal discipline by controlling expenditure. Had this not been the case, RBI would not have said that 'it was willing to look at an easing monetary stance.'

What Next:

The onus is now on the new government to take steps to give the comfort to RBI to cut rates. While controlling inflation is RBI's responsibility, stimulating economic growth rests largely with the government. RBI wants the government to kick-start all stalled investment projects. The government has to work towards bringing in efficiencies to move goods to the market faster than it is done now. RBI calls it supply side constraints. While demand for goods and services remains high, supply bottlenecks hurt. Analysts therefore do not expect RBI to rapidly cut rates till such time it sees a convincing action by the government. "We expect further moderation in policy stance without rate action in RBI's third bi-monthly monetary policy statement scheduled on August 5th 2014," said Kotak Securities in its review of the economic policy.

Also Read:

• RBI governor Raghuram Rajan's statement is worth reading.Read more

• RBI puts onus on the government now. Analysis explains the co-ordination between the government and RBI needed. Read more