Highlights of RBI’s Monetary Policy 2022-23

Prabhat Nigam

26 Apr, 2022

Introduction  

The Reserve Bank of India (RBI) has released the first monetary policy on 8^th April, 2022 for the financial year of 2022-23. The policy has been released as the world is engulfed in geopolitical tensions and the economies are recovering from pandemic. Taking into account the existing and evolving macroeconomic situation, the monetary policy 2022-23 has tried to maintain an accommodative stance where the focus is on positive growth through policy support by expanding money supply. The monetary policy 2022-23 has declared that it is moving in the direction of a neutral policy at the end of the year. This is the reason why the policy has kept the repo rate and reverse repo rate unchanged at 4% and 3.35% respectively.    

What is India’s monetary policy?

The macroeconomic policy released by the RBI is called the India’s monetary policy. The monetary policy of India^[1] is aimed at maintaining the price stability without deviating from the growth objective. Ability to manage price stability is the bedrock of sustainable growth. The monetary policy manages the policy rate changes which are channelized to the money market and then to the entire financial system. All these changes further shape the aggregate demand which is the key determinant of growth and inflation.

In order to maintain flexible inflation, RBI Act was amended in 2016. The new framework after amendment seeks to set the policy rate taking into account the existing and evolving macroeconomic situation. The aim is also to shape the liquidity conditions to keep the money market rates at or around repo rate.

What is a monetary policy framework?

The Monetary Policy framework is aimed at determining the policy rate taking into account the existing and evolving macroeconomic situation of the country. The operating framework of the Monetary Policy keeps is revised taking into consideration the monetary conditions and the evolving financial markets while ensuring that consistency is maintained in the monetary policy stance. 

What is the framework of Monetary Policy Committee?

• The Monetary Policy Committee (MPC) comprises of the Chairperson who is the governor of RBI.
• Member who is a Deputy Governor, RBI who is in charge of the Monetary Policy
• 4 other Members

Key highlights of the Monetary Policy 2022-23

Following are key highlights of the Monetary Policy 2022-23:

1. Aim of the Monetary policy 2022-23

The aim of the monetary policy is to achieve the medium terms target for Consumer Price Index (CPI) inflation of 4% within a band of +/- 2% at the same time supporting growth. As expected, the monetary policy has continued with its accommodative policy stance which is aimed at supporting growth in the wake of pandemic led slump. Taking this into consideration the monetary policy has kept the policy repo rate unchanged. It is expected that monetary policy will transition into a neutral policy by the end of this financial year with a view to keep a check on inflation.

• The instruments of monetary policy 2022-23

It can be seen that the instruments of the monetary policy have policy have remain unchanged with addition of a new policy tool called Standing Deposit Facility (SDF). The SDF has been brought as a floor for Liquidity Adjustment Facility corridor with a view to absorb liquidity. Introduction of SDF is expected to provide symmetry to the operating framework of the monetary policy as it offers absorption facility at the bottom of Liquidity Adjustment Facility (LAF) just as Marginal Standing Facility which acts a standing injection tool called Marginal Standing Facility (MSF) at the upper end of LAF corridor.

The expectation from the SDF is that it will pump out excess liquidity in the system without the need of exchanging collaterals such as government backed securities (G-Secs). The interest rate in case of SDF has been fixed at 3.75 percent which is 25 basis points lower than the repo rate while the MSF rates continue to be fixed at 25 basis points higher than policy rate. This restores the width of the LAF corridor to the pre pandemic levels of 50 basis points, symmetrically around the repo rate at the centre of LAF corridor.   

• Unchanged rates of monetary policy instruments  

The rates of most of the monetary policy instruments have remain unchanged which includes Repo rate, Reverse repo rate, Marginal Standing Facility, Bank Rate, Cash Reserve Ratio, Statutory Liquidity Ratio. The only exception is the addition of a new monetary policy instrument called Standing Deposit Facility (SDF) which has been fixed at 3.75%.

Further, the present limit of under Held to Maturity (HTP) category has also been increased by the RBI from 22% to 23% of NDTL till 31^st March, 2023 with a view to support the government borrowing programme.

• Monetary Policy Projections

In its latest policy, the Monetary Policy has trimmed projections made by it in reference to GDP growth to 7.2% as against 7.8% for the Financial Year 2022-23.

The experts further claim that the RBI is moving towards a more hawkish monetary policy by raising the projection of annual inflation by more than one percentage point i.e. from the earlier projection of 4.5% to 5.7% for the financial year 2022-23.

Conclusion 

The RBI’s monetary policy tries to be accommodative. However, the aim of the monetary policy is to support growth over inflation. RBI wishes to adopt a more neutral policy stance and focuses primarily on the price stability later in the year.  

Read Our Article: Key Highlights of the RBI Monetary Policy 2021