What are Hawks and Doves in Finance

When ever our RBI Governor mentions that interest rates are increased this time, 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. Like the predatory hawk that grabs any unsuspecting prey, hawkish policymakers go on the 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 that if you keep rates low, companies will borrow more, build more manufacturing units, produce more goods and services. Thus, supply will eventually catch up to demand, reducing inflation.



image courtesy: http://www.macrobusiness.com.au

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 (pls refer to my previous article on repo rate http://thekalyan.com/2013/12/16/rbi-what-is-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 and other things. 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 I care?

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

well, it is always not possible to have the government in dovish mood, both have the positives and negatives.

For more pls check the The Business Line, 4th Feb 2014

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