Hawks and Doves in Finance.

When the RBI Governor mentions that the interest rates are increased, it is hawkish and vice versa is dovish.

What are they?

Policymakers are labeled as hawks or doves depending on how aggressive they are in dealing with the economic factors. Like the predatory hawk that grabs any unsuspecting prey, hawkish policymakers become offensive to tackle a problem. They keep the inflation in check with high interest rates.

Dovish policymakers, on the other hand, are peace-loving and prefer sweet-talking the enemy into submission. They argue keeping the rates low will help companies to borrow more, build more manufacturing units and produce more goods and services. Thus, supply will eventually catch up to demand there by reducing inflation.

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Why are they important?

If the RBI is hawkish — believes that inflation is a worry. What does it do? It promptly increases the repo rate, the rate at which banks borrow money from the RBI. Banks in turn try recovering this increase in cost from their customers in the form of higher loan rates. This works towards reducing people’s spending — people take fewer loans and buy fewer homes, cars etc. As consumption falls, it helps control prices. So, if you can’t produce more goods quickly, the next best thing to do is to make people buy fewer goods.

Why should We care?

For example:

You’ve been planning to buy a house for quite some time and you intend on taking a bank loan. But, you might have to think if the RBI is in a hawkish mood. If you take the loan now, your EMIs (equated monthly installments) may go up as the RBI hikes interest rates. But you are benefited if you have more number of bank deposits. As interest rates increases, you get a better return on your deposits. Also, if the government is in hawkish mood, there can be higher taxes and lower subsidies.

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