We highlight the key takeaways from the first monetary policy announced by the central bank, Reserve Bank of India (RBI), for financial year 2022-23. While the policy stance remains accommodative, it aims to support growth over inflation. Overall, the RBI intends to establish a more neutral policy stance and will focus solely on price stability later in the year.
Amid rising geopolitical tensions and easing pandemic conditions, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) announced the first monetary policy for the financial year (FY) 2022-23 on April 8, 2022. On the basis of a fair assessment of the current and evolving macroeconomic situation, the MPC has maintained an accommodative stance – targeting positive growth through policy support by expanding money supply. However, it has declared its intention to move towards a neutral policy stance later in the year. The MPC has kept the repo rate and the reverse repo rate unchanged at four percent and 3.35 percent, respectively.
The monetary policy is aimed at achieving the medium-term target for consumer price index (CPI) inflation of four percent within a band of +/- two percent, while supporting growth. In line with expectations, the MPC has continued with its accommodative policy stance – which is aimed at supporting growth in the wake of the COVID-19 pandemic-led slump. For the purpose, the MPC voted unanimously in favor of keeping the policy repo rate unchanged.
It is expected that June 2022 onwards, this policy stance shall transition to a neutral one, primarily intending to keep inflation in check.
Monetary policy instruments remain unchanged, with the exception of a new policy tool called Standing Deposit Facility (SDF). The SDF has been introduced as the floor of Liquidity Adjustment Facility (LAF) corridor to absorb liquidity. This move is aimed at providing symmetry to the operating framework of the monetary policy as it introduces an absorption facility at the bottom of LAF corridor, similar to the standing injection tool called Marginal Standing Facility (MSF) at the upper end of LAF corridor.
The SDF is intended to pump out excess liquidity from the system without exchanging collaterals like government-backed securities (G-Secs). The interest rate for SDF has been fixed at 3.75 percent, 25 basis points lower than the repo rate. The MSF rates continue to be 25 basis points higher than the policy rate. Thus, the width of the LAF corridor is restored to the pre-pandemic pattern of 50 basis points, symmetrically around the repo rate at the center of the LAF corridor.
Monetary Policy Instruments – Rates Announced by MPC FY 2022-23
Policy tools
Rate before monetary policy 2022-23
Rate after monetary policy 2022-23
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