RBI Monetary Policy 2022: The Reserve Bank of India (RBI), on 5 August 2022, announced Monetary Policy Review.

Key Details:

On the basis of assessment of current and evolving macroeconomic situation, in its latest policy iteration, RBI’s Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das, has decided -

• To hike policy repo rate by 50 basis points, under liquidity adjustment facility (LAF).

• Repo rate now stands at 5.40%.

• To make adjustment in the following-

• Marginal Standing Facility (MSF) to 5.65%
• Bank Rate to 5.65% 
• Standing Deposit Facility (SDF) to 5.15%

• To focus on withdrawal of accommodation, in a bid to ensure that inflation is within the target onwards.
• MPC decision are in line with the objective of attaining medium-term target for consumer price index (CPI) inflation to 4% within a band of +/- 2%, while supporting growth.

Why were these decisions taken?

• These decisions were taken by considering that;
• Since the MPC meeting in June 2022, the global economic and financial landscape has become worse.
• Recession risk has increased as monetary policies around the world have tightened and the war in Europe has continued.
• The risks to emerging market economies' growth and financial stability are increasing as a result of capital outflows and reserve losses.
• The domestic economic activity is robust.
• Currently, South-west monsoon rainfall is 6% above the long period average. Kharif sowing is lifting. Demand across urban areas is strengthening whereas the rural demand is gradually increasing.
• CPI inflation decreased to 7.0% (year-on-year), during May-June 2022 as compared to 7.8% in April. Food inflation has witnessed some moderation.

About Monetary Policy Committee (MPC):

• The Central Government constituted the six-member monetary policy committee (MPC) in September 2016, according to the Section 45ZB of the amended RBI Act, 1934.
• It is led by the Governor of RBI.
• It has 6 members- 3 officials of RBI and 3 external members.
• Of these six members, the Government of India (GoI) appoints three persons.
• No Government official is nominated to the Monetary Policy Committee.

Current members of Monetary Policy Committee:

• Shaktikanta Das (Governor of RBI)
• Michael Debabrata Patra (Deputy Governor of RBI),
• Dr Rajiv Ranjan (Executive Director of RBI)
• Jayanth R. Varma (IIM Ahemdabad)
• Ashima Goyal (Indira Gandhi Institute of Development Research,Mumbai)
• Shashanka Bhide senior advisor at the New Delhi-based think tank National Council for Applied Economic Research

Monetary Policy:

• MPC fixes the benchmark interest rate in India, by holding meetings for at least 4 times a year.
• Its decisions are published after each meeting.

Some important instruments of Monetary Policy are as follows:

The RBI’s Monetary Policy has several direct and indirect instruments which is used for implementing the monetary policy.

Repo Rate: It is the (fixed) interest rate at which banks can borrow overnight liquidity from the Reserve Bank of India (RBI) against the collateral of government and other approved securities under the liquidity adjustment facility (LAF).

Reverse Repo Rate: It is the (fixed) interest rate at which the Reserve Bank of India (RBI) can absorb liquidity from banks on an overnight basis, against the collateral of eligible government securities under the LAF.

Liquidity Adjustment Facility (LAF): The LAF has overnight as well as term repo auctions under it. The term repo helps in the development of the inter-bank term money market. This market sets the benchmarks for pricing of loans and deposits. This helps in improving the transmission of monetary policy. As per the evolving market conditions, the Reserve Bank of India also conducts variable interest rate reverse repo auctions.

Marginal Standing Facility (MSF): MSF is a provision which enables the scheduled commercial banks to borrow additional amount of overnight money from the Reserve Bank of India. Bank can do this by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This helps the banks to sustain the unanticipated liquidity shocks faced by them.

Accommodative stance of RBI’s Monetary Policy Statement:

• Accommodative stance is taken by the RBI’s Monetary Policy Committee to expand the overall money supply to boost the economy when the growth is slowing down.

Important Takeaway:

The following are the fullform given in context of the questions asked in recent exams:

Important Full forms used in the governor speech:

Weighted average call rate (WACR): The operating target of monetary policy

Standalone Primary Dealers (SPDs): A primary dealer is a bank or other financial institution that has been approved to trade securities with a national government.

Bharat Bill Payment System (BBPS): It is an integrated bill payment system in India offering interoperable and accessible bill payment service to customers through a network of agents of registered member as Agent Institutions, enabling multiple payment modes, and providing instant confirmation of payment

Overnight Indexed Swap (OIS):  is an interest rate swap agreement where a fixed rate is swapped against a pre-determined published index of a daily overnight reference rate for example SONIA (GBP) or EONIA (EUR) for an agreed period.

Mumbai Interbank Outright Rate (MIBOR): is the interest rate at which banks can borrow funds from other banks in the Indian interbank market.