The Reserve Bank of India (RBI) has stuck to its guns, keeping the Repo rate unchanged at 4% during its latest monetary policy review. This marks the eleventh time the stance has been maintained, highlighting RBI’s intent to control inflation through a measured withdrawal of surplus liquidity. The article will explore the significance of these decisions, their implications on inflation and growth, and discuss some key monetary policy instruments.
Impact of Global Events on Monetary Policy Review
The recent geopolitical tensions between Russia and Ukraine have had a worldwide impact, including India. Crude oil and commodity prices have surged, prompting the RBI to lower its growth forecast for fiscal year 2022-23 from 7.8% to 7.2%. The war could temper economic recovery even further by escalating commodity prices and triggering global fallout. To counter these potential repercussions, RBI has turned to the Standing Deposit Facility, a new measure designed to absorb excess liquidity and mitigate inflation.
Standing Deposit Facility: A tool to tackle inflation
The Standing Deposit Facility (SDF) aims to suck out Rs 8.5 lakh crore worth of surplus liquidity from the financial system, a significant move towards controlling inflation. Launched under the authority granted by the 2018 amendment of Section 17 of the RBI Act, it operates by removing the collateral constraint on the RBI, thus enhancing its monetary policy framework. At present, its interest rate stands at 3.75%. Looking forward, RBI plans to withdraw this liquidity gradually and non-disruptively over several years, starting this year.
A Shift in Policy Stance
The recent policy review signals that RBI is recalibrating its priorities to focus more on inflation. It has hiked its inflation forecast for 2022-23 from 4.5% to 5.7%, which is still below the upper band of RBI’s 6% target. This, combined with the introduction of the Standing Deposit Facility, indicates a potential hike in its key policy rate in the coming months.
Resorting to Pre-pandemic Levels
As a part of its new strategy, the RBI has restored the policy rate corridor under Liquidity Adjustment Facility (LAF) to its pre-pandemic width of 50 basis points, intending to further ease inflationary pressures. This will allow banks to borrow funds from the RBI or lend to it through repo or reverse repo agreements, respectively.
Instruments of Monetary Policy
Several instruments aid the RBI in managing monetary policy effectively. These include Repo and Reverse Repo rates, the Marginal Standing Facility (MSF), the Cash Reserve Ratio (CRR), the Liquidity Adjustment Facility (LAF), the Market Stabilisation Scheme (MSS), the Bank Rate, the Statutory Liquidity Ratio (SLR), and Open Market Operations (OMOs).
Various Policy Stances of RBI
Depending on prevailing conditions, the RBI adopts different policy stances. An accommodative stance, for example, is used when economic growth needs a boost and inflation is under control. A neutral stance is employed when both growth and inflation require equivalent attention. Conversely, a hawkish stance demonstrates RBI’s dedication to keeping inflation low, even at the cost of raising interest rates to curb demand. Finally, calibrated tightening represents a phase where rate cuts are ruled out, but rate hikes are executed in a measured manner.
This comprehensive overview offers insights into the crucial role that monetary policy plays in balancing the intricacies of economic growth, inflation, and liquidity in a nation’s financial system. It also underscores the significance of the actions taken by the RBI and how they can shape the economic scenario in India.
