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Hawks or Doves: Where is India's Monetary Policy Leaning As We Enter 2020?

By Finserv MARKETS - Dec 30,2019
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You may seldom hear about them but these two high-profile ‘birds’ are equally important as the other two ‘beasts’ of the financial jungle. If bull and bears are undisputed beasts of the markets, hawks and doves impact things in the higher plane, especially monetary policy and other economic matters.

As we enter 2020, it is time to see beyond bulls and bears and check where India’s monetary policy is heading. Are things “hawkish” or “dovish” in the country’s economic policy and what should we expect next year?

But before we do that, let’s understand the real meaning of Hawks and Doves when it comes to monetary policy.

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What is ‘Hawkish Economic Policy’?

If you know the term “hawkish,” which means someone who takes a tough stand on things, you will get the idea. Hawks have a sharp eye and a razor-sharp focus. When it comes to monetary policy, hawks are primarily focused on keeping inflation in check by supporting a high-interest rate regime. In sharp contrast to a dove, they do not worry about things such as high unemployment rates and slowing economic growth.

What is ‘Dove Economic Policy’?

So, what does the dove stand for? It stands for peace; a softer approach to things compared to a hawk, which is more aggressive. A dove will support and advocate low-interest rates because their objective is to focus on economic indicators such as low employment rather than low inflation.

An economic policy advisor who is a dove believes that low-interest rates boost economic growth by encouraging consumer borrowings which results in increased consumer spending. If there’s a single yardstick that differentiates a hawk and a dove, it is their approach to interest rates. In simple words, hawks prefer higher interest rates and doves prefer lower interest rates.

Hawks or Doves - India’s Monetary Policy in 2020

Is India taking a Hawkish or Dovish stance leading to 2020?

Well, it’s quite clear that India’s economic policymakers have played the role of a dove quite well, especially in 2019. In 2019, the Reserve Bank of India (RBI) made five consecutive rate cuts within a span of 8 months from February-October 2019. The central bank reduced the repo rate by a total of 135 bps during the same period. [1]

RBI Repo Rate Cuts since Feb, 2019

Hawks or Doves - India’s Monetary Policy in 2020
The objective, of course, was to speed up borrowings and increase retail consumption to arrest the economic slowdown gripping the country. As GDP growth has plummeted to 4.5% from 5% in Q2 of 2019-20 [4] and unemployment rates are growing, the country’s policymakers have no option but to take a dovish stance for now.

However, it is also a fact that indefinite low-interest rates spell can lead to high inflation rates which can again be detrimental for the economy. As steep hikes in prices of onions, fuel and other essential items are already crippling the household budget; a high inflation rate at this stage may deal a deadly blow on household expenditure and savings. This will further reduce retail consumption and accelerate the slowdown.

What next?

After 5 consecutive repo rate cuts in 8 months, the RBI decided to keep the repo rate unchanged at 5.15% in its Monetary Policy Committee (MPC) meeting on December 5, 2019. As expected, the reason was inflationary pressure. The RBI has also revised its inflation rate forecast from 3.5-3.7% to 4.7-5.1% for the second half of FY 2019-20.

Are these signs of things to come? Will RBI change its stance from dovish to hawkish now? That doesn’t seem likely in the short term but it may have to do so to check high inflation rates in the near future.

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