RBI Monetary Policy 2022-23: Key Highlights

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.

India’s monetary policy for 2022-23: Key takeaways

Objective and policy stance

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

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.

In order to support the government borrowing program, the RBI has also increased the present limit under the Held to Maturity (HTM) category for banks from 22 percent to 23 percent of NDTL till March 31, 2023.

Projections

• In its latest policy, the MPC has trimmed its projection for real GDP growth for FY 2022-23 to 7.2 percent, as against the 7.8 percent rate projected in the previous MPC.

• Experts claim that the monetary policy has turned hawkish, with the RBI raising its projection of annual inflation by more than one percentage point to 5.7 percent for FY 2022-23 from its earlier projection of 4.5 percent.

Monetary policy in India

India’s monetary policy is the macroeconomic policy laid down by the RBI, primarily aimed at maintaining price stability, without losing focus of the growth objective. Price stability is a necessary precondition to sustainable growth. It manages policy rate changes, which are transmitted through the money market to the entire financial system, in turn influencing aggregate demand – the key determinant of inflation and growth.

In May 2016, the RBI Act was amended to provide for flexible inflation. The new framework aims at setting the policy rate based on an assessment of the current and evolving macroeconomic situation. It also aims at modulating the liquidity conditions to anchor money market rates at or around the repo rate.

Flexible inflation targeting framework (FITF)

The 2016 amendment introduced the flexible inflation targeting framework, where the central government sets the inflation target for a period of five years, in consultation with the RBI.

The central government has retained the earlier inflation target of four percent, with a tolerance band of +/- two percentage points for the five-year period (2021-2026).

Monetary policy framework (MPF)

• The framework aims at setting the policy rate based on an assessment of the current and evolving macroeconomic situation.
• Once the repo rate is announced, the operating framework designed by the RBI envisages liquidity management on a day-to-day basis through appropriate actions, which aim at anchoring the operating target – the weighted average call rate (WACR) – around the repo rate.
• The operating framework is fine-tuned and revised depending on the evolving financial market and monetary conditions, while ensuring consistency with the monetary policy stance.

Monetary policy committee (MPC)

The MPC was constituted by the central government under Section 45ZB to determine the policy interest rate required to achieve the inflation target. Section 45ZB provides that the decision of the MPC shall be binding on the RBI.

The MPC at present consists of following members:

• Chairperson – Governor, RBI, ex officio: Shri Shaktikanta Das
• Deputy Governor, RBI (in charge of monetary policy) – Member, ex officio: Dr Michael Debabrata Patra
• An RBI officer, to be nominated by the Central Board – Member, ex officio: Dr Mridul K. Saggar
• A professor at Indira Gandhi Institute of Developmental Research (IGIDR): Prof. Ashima Goyal
• A finance professor at the Indian Institute of Management, Ahmedabad (IIM-A): Prof. Jayanth R Varma
• An agricultural economist and a senior adviser with the National Council of Applied Economic Research (NCAER): Dr Shashanka Bhide

Monetary policy process (MPP)

• The MPC determines the policy interest rate required to achieve the inflation target.
• The RBI’s Monetary Policy Department (MPD) assists the MPC in formulating the monetary policy. Views of key stakeholders in the economy, and analytical work of the RBI contribute to the process for arriving at the decision on the policy repo rate.
• The Financial Markets Operations Department (FMOD) operationalizes the monetary policy, mainly through day-to-day liquidity management operations. The Financial Markets Committee (FMC) meets daily to review the liquidity conditions so as to ensure that the operating target of the weighted average call money rate (WACR) is aligned with the repo rate.

Monetary policy instruments (MPI)

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