Indian Economy
Monetary Policy Review: RBI
- 09 Apr 2022
- 11 min read
For Prelims: Standing Deposit Facility , RBI, Monetary Policy Committee (MPC), Instruments of Monetary Policy, Various Policy Stances of RBI
For Mains: Inflation Targeting by RBI, Monetary Policy,Standing Deposit Facility and its Significance
Why in News?
Recently, for the eleventh time in a row, the Reserve Bank of India (RBI) in its latest Monetary Policy review has decided to keep the main policy rate – Repo rate – unchanged at 4%.
- It has also retained its accommodative stance, but indicated it will engage in a gradual and calibrated withdrawal of surplus liquidity to rein in inflation.
What is the Significance of this Monetary Policy Review?
- Acknowledging the Impact of Russia-Ukraine War: In the wake of the rise in crude oil and commodity prices and the impact of the Russian invasion of Ukraine, RBI has slashed the growth forecast to 7.2% for fiscal 2022-23 from 7.8% projected earlier.
- The Russia-Ukraine war could potentially impede the economic recovery through elevated commodity prices and global spill-over channels.
- Standing Deposit Facility: The RBI also introduced a new measure, the Standing Deposit Facility — an additional tool for absorbing liquidity — to suck out surplus liquidity of Rs 8.5 lakh crore from the financial system which is fuelling inflation.
- Signalling Shift in Policy Stance: This Monetary Policy Review signals that the RBI has finally shifted its priorities to tackle inflation.
- Thus, there is a possibility of a hike in its key policy rate (Repo Rate) in the coming months.
- Further, RBI has hiked its inflation forecast from 4.5% projected earlier to 5.7% still below the upper band of 6% of the RBI’s target – in 2022-23.
- Resorting to Pre-pandemic Levels: RBI policy panel took a concrete step by restoring the policy rate corridor under Liquidity Adjustment Facility(LAF) to pre-pandemic width of 50 basis points.
- This is aimed at bringing down the inflationary pressures.
- LAF is a tool used in the monetary policy that allows banks to borrow money from the RBI through repurchase agreements (Repo) or to lend funds to the RBI through reverse repo agreement.
What is Standing Deposit Facility & Its Role?
- About: The RBI has introduced the Standing Deposit Facility (SDF), an additional tool for absorbing liquidity, at an interest rate of 3.75%.
- It is an additional tool for absorbing liquidity without any collateral.
- Background: In 2018, the amended Section 17 of the RBI Act empowered the RBI to introduce the SDF.
- Modus Operandi: 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.
- Need: The “extraordinary” liquidity measures undertaken in the wake of the pandemic, combined with the liquidity injected through various other operations of the RBI, have left a liquidity overhang of the order of Rs 8.5 lakh crore in the system.
- The main purpose of SDF is to reduce the excess liquidity in the system, and control inflation.
- Implementation: The RBI will engage in a gradual and calibrated withdrawal of this liquidity over a multi-year time frame in a non-disruptive manner beginning this year.
Various Instruments of Monetary Policy | |
Repo Rate: |
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Reverse Repo Rate: |
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Marginal Standing Facility (MSF): |
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Corridor: |
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Cash Reserve Ratio (CRR): |
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Liquidity Adjustment Facility (LAF): |
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Bank Rate: |
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Statutory Liquidity Ratio (SLR): |
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Various Policy Stances of RBI | |
Accommodative: |
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Neutral: |
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Hawkish Stance: |
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Calibrated Tightening: |
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UPSC Civil Services Examination, Previous Year Questions (PYQs)
Q. If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do? (2020)
- Cut and optimise the Statutory Liquidity Ratio
- Increase the Marginal Standing Facility Rate
- Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3
Ans: (b)