FAQ

RBI increases Repo rate for the third consecutive time as it turns hawkish on inflation

Tags: Economy/Finance

The Reserve Bank of India (RBI) governor Shaktikanta Das has announced on 5 August 2022 that the Monetary policy committee (MPC) has decided to increase the policy repo rate by 50 basis points (0.50%). It is the third such increase by the RBI to curb soaring inflation in the country. Earlier on 8 June 2022 it increased Repo rate by 0.5%.

Every two months RBI review its annual monetary policy.

Inflation control a priority 

• The central bank maintained its inflation forecast for 2022-23 to 6.7 percent with expectation of a good monsoon and expectation of further decline in the metal prices in the international market. 
• The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
•  It means that RBI will follow a tight monetary policy where money supply in the market will be reduced so as to control inflation.
• That is why RBI has been increasing Repo rate which in turn will force the bank to increase their lending rate. It makes car loans, home loans etc costly. It will reduce money supply in the market. 
• According to the RBI the medium term target for consumer price index (CPI) inflation is of 4 percent within a band of +/- 2 percent. It means that RBI will be comfortable if the inflation rate is maximum 6% or minimum 2%.

Steps announced by RBI.

Policy Rates 

 Policy Repo Rate 

• The policy repo rate was increased from 4.9% to 5.40 % with immediate effect. 
• The rate at which RBI lends to the banks for a short term period is called the Repo rate.

Reverse Repo Rate 

• There was no change in the fixed reverse repo rate and it is 3.35 %.
• In Reverse repo, the commercial banks deposit their excess liquidity with RBI for a short term period and the RBI pays interest on such deposits.

Standing Deposit Facility (SDF)

• The Standing Deposit Facility (SDF) has been increased from 4.65% to 5.15%.  
• The interest rate offered on SDF is always 0. 25 % below the repo rate.

Marginal Standing Facility (MSF)

• The marginal standing facility has been increased from 5.15% to 5.65%.
• MSF is the rate at which RBI provides short term loans to the banks.
• It is kept 0. 25% above the repo rate.

Bank Rate 

• The bank rate has been increased to 5.65% from 5.15%. 
• Bank rate is the rate at which RBI lends to the banks for a long term period.
• Bank rate and marginal standing facility are always kept the same by the RBI.

Reserve Ratios

Cash Reserve Ratio (CRR)

• There has been no change in the Cash Reserve Ratio (CRR). It is 4.50%.
•  Banks have to keep a certain percentage of their Net Time and Demand Deposit Liabilities (NDTL) with the RBI in the form of cash called as CRR.

Statutory Liquidity Ratio (SLR)

• There has been no change in Statutory Liquidity Ratio (SLR). It is 18%. 
• Banks have to keep a certain percentage of their Net Time and Demand Deposit Liabilities (NDTL) with themselves in the form of cash, gold or approved government securities called SLR.

GDP growth forecast for 2022-23  

 RBI expects the real GDP growth for 2022-23 to be 7.2 %

The quarter wise expected growth rate for 2022-23

•  Q1(April to June 2022) at 16.2 percent;
•  Q2(July to September 2022) at 6.2 percent; 
• Q3(October  -December 2022 ) at 4.1 percent; and
•  Q4 (January-March 2023) at 4.0 percent.

Note: 100 basis points (bps) is equal to 1%   

What is Monetary Policy Committee 

• Under Section 45ZB of the amended RBI Act 1934, the Central government is empowered to constitute a six-member Monetary Policy Committee (MPC) to determine the policy interest rate required to achieve the inflation target. 
• The first such MPC was constituted on September 29, 2016.
• Currently, the 6 members of the Monetary Policy committee are Shaktikanta Das (Governor of RBI), Dr. Michael Debabrata Patra (Deputy Governor of RBI), Dr Mridul K. Saggar, Prof. Jayanth R. Verma, Dr. Shashanka Bhide, Dr. Ashima Goyal. All four are economists.
• As per the RBI Act, the MPC must meet a minimum of four times in a year.
• The next MPC on September 28-30, and December 5-7, and the final meeting on February 6-8, 2023.