Monetary Policy Review: RBI

In News

• Unveiling the first bi-monthly monetary policy review of the fiscal 2022-23 the Monetary Policy Committee of the RBI decided unanimously to leave the key policy rate unchanged and to remain accommodative. 

Key takeaways from MPC meeting

• Repo rate remains unchanged:
  • The RBI decision to keep Repo rates unchanged at 4 percent will help banks to keep interest rates in the financial system unchanged, aiding growth in the economy.
  • Borrowers won’t have to shell out more on EMIs and loan repayments at least for the time being.
• The RBI has introduced the Standing Deposit Facility (SDF):
  • It is a new tool for absorbing liquidity at an interest rate of 3.75 per cent, making the reverse repo almost irrelevant.
  • The SDF will replace the fixed rate reverse repo (FRRR) as the floor of the LAF (liquidity adjustment facility) corridor.
  • In 2018, the amended Section 17 of the RBI Act empowered the central bank to introduce the SDF as an additional tool for absorbing liquidity without any collateral.
  • By removing the binding collateral constraint on the RBI, the SDF strengthens the operating framework of monetary policy.
  • The SDF is also a financial stability tool in addition to its role in liquidity management.
  • The SDF rate will be 25 bps below the policy rate (Repo rate), and it will be applicable to overnight deposits at this stage.
• GDP growth and Inflation:
  • The central bank has slashed the growth forecast to 7.2 per cent for fiscal 2022-23 from 7.8 percent predicted earlier in the wake of the rise in crude oil and commodity prices and the after-effect of the Russian invasion of Ukraine.
  • It has increased the retail inflation from 4.5 percent projected earlier to 5.7 per cent in 2022-23.
• Accommodative stance continues:
  • It also decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

Challenges

• Escalating geopolitical tensions: Although India’s direct trade exposure to countries at the epicenter of the conflict is limited; the war could potentially impede the economic recovery through elevated commodity prices and global spill-over channels.
• High inflation and Low growth: Generalized hardening of global commodity prices, the likelihood of prolonged supply chain disruptions, dislocations in trade and capital flows, divergent monetary policy responses and volatility in global financial markets are imparting sizeable upside risks to the inflation trajectory and downside risks to domestic growth.
• Concerns over protracted supply disruptions have rattled global commodity and financial markets.

Way forward/ Suggestions

• The government’s thrust on capital expenditure coupled with initiatives such as the production linked incentive (PLI) scheme should bolster private investment activity, amidst improving capacity utilization, deleverage corporate balance sheets, higher off take of bank credit and congenial financial conditions.
• The RBI has set the stage for a gradual rise in the policy rates later in the year and the process of slowly tightening the monetary policy.

Source: IE