Monetary Policy Committee


What is in the News ?

  • The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Friday left unchanged the key policy rate — Repo rate — at 4 per cent and the Reverse repo rate at 3.35 per cent.
  • The central bank retained its accommodative policy stance but hinted that it will be less accommodative in the wake of elevated inflation levels.
  • However, the RBI introduced the Standing Deposit Facility (SDF) – an additional tool for absorbing liquidity – at an interest rate of 3.75 per cent.
  • The policy panel slashed the GDP growth to 7.2 per cent and hiked the inflation forecast at 5.7 per cent for the fiscal 2022-23.

Key Takeaways of the Meeting

  • Repo Rate Unchanged : The RBI decision to keep Repo rates unchanged at 4 per cent will help banks to keep interest rates in the financial system unchanged, aiding growth in the economy. 
  • Reverse Repo Rate Unchanged : It has retained the reverse repo rate, the rate at which RBI borrows from banks, unchanged at 3.35 per cent. A hike would have signalled the start of the reversal of the monetary policy cycle that would eventually lead to a rise in rates.
  • Standing Deposit Facility : It will be an additional tool for absorbing liquidity without any collateral.  The SDF, with an interest rate of 3.75 per cent, will replace the fixed rate reverse repo (FRRR) as the floor of the LAF corridor.
  • Both the standing facilities – the MSF and the SDF – will be available on all days of the week, throughout the year.
  • Continuation of Accommodative Stance :
  • 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.
  • “The MPC decided unanimously to remain accommodative while focussing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth,” RBI Governor Shaktikanta Das said.
  • Higher Inflation, Slower Growth :
  • The central bank has slashed the growth forecast to 7.2 per cent for fiscal 2022-23 from 7.8 per cent projected earlier in the wake of the rise in crude oil and commodity prices and the aftereffect of the Russian invasion of Ukraine.
  • It has increased the retail inflation from 4.5 per cent projected earlier to 5.7 per cent in 2022-23.
  • “Escalating geopolitical tensions have cast a shadow on our economic outlook. The war could potentially impede the economic recovery through elevated commodity prices and global spillover channels,” Das said.
  • Das said the conflict in Europe now poses a new and overwhelming challenge, complicating an already uncertain global outlook.
  • “As the daunting headwinds of the geopolitical situation challenge us, the RBI is braced up and prepared to defend the Indian economy with all instruments at its command. As we have demonstrated over the last two years, we are not hostage to any rulebook and no action is off the table when the need of the hour is to safeguard the economy,” Das said.
  • “Our goals of price stability, sustained growth and financial stability are mutually reinforcing and we continue to be guided by this approach,” he said.

More on SDF

  • The main purpose of SDF is to reduce the excess liquidity of Rs 8.5 lakh crore in the system, and control inflation.
  • In 2018, the amended Section 17 of the RBI Act empowered the Reserve Bank to introduce the SDF – 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.
  • It would, however, retain the flexibility to absorb liquidity of longer tenors as and when the need arises, with appropriate pricing.
  • The fixed rate reverse repo (FRRR) rate which is retained at 3.35 per cent will remain part of the RBI’s toolkit, and its operation will be at the discretion of the RBI for purposes specified from time to time.
  • The FRRR along with the SDF will impart flexibility to the RBI’s liquidity management framework, the RBI said.