FAQ

RBI lower GDP growth rate and raises inflation projection for 22-23 in the April Monetary Policy

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The Monetary Policy committee (MPC) headed by Reserve Bank of India (RBI) Governor Shaktikanta Das kept key repo rate unchanged but hiked the reverse repo rate by 40 bps to 3.75 percent on April 8,2022 and emphasised on the need of withdrawal of accommodation in its first policy meeting of FY23. 

The main highlights of the Policy 

Changes in the Rates 

There has been no change in the Reverse Repo Rate and has been kept at 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.

100 basis points (bps) is equal to 1%.

Repo Rate 

There has been no change in the Repo Rate. The current rate is 4%. The rate at which RBI lends to the banks for a short term period is called the Repo rate.

This is the eleventh time in a row that the MPC headed by RBI Governor Shaktikanta Das has maintained the status quo of repo rate.

Since March 2020, the central bank has cut its key lending rate, or repo rate, by 115 basis points to support the economy in the face of economic fallout from the pandemic.

Bank Rate and MSF 

There has been no change in the Bank Rate and Marginal Standing Facility(MSF). 

Bank rate is the rate at which RBI lends to the banks for a long term period . Current rate is 4.25%

MSF is the rate at which RBI provides short term loans to the banks.

Current rate is 4.25%

Ratios 

There has been no change in the Reserve Ratios of CRR and SLR 

Cash Reserve Ratio (CRR) : 4%

Statutory Liquidity Ratio (SLR) : 18%

 Expected GDP growth rate in 2022-23 

The RBI lowered its projected Gross Domestic Product(GDP) growth for FY23 to 7.2 percent from 7.8 percent that was projected in the last meeting. 

Increase in Inflation 

RBI expects the Consumer Price Index (CPI)based inflation rate to be 5.7% as compared to 4.5 percent predicted earlier. Due to the Russia-Ukraine war, RBI expects oil prices to remain high and disruption in commodities supply which could lead to higher inflation in India. 

The government has mandated the central bank to keep the inflation rate at 4 percent (+,- 2 percent).

RBI has decided to restore the liquidity adjustment facility (LAF) corridor to 50 basis points (bps). It means the difference between the reverse repo rate and the MSF will be 0.5%.

Standing Deposit Facility (SDF) 

RBI has introduced the Standing deposit facility (SDF). 

Under SDF banks can deposit their surplus liquidity with RBI and RBI will pay 3.75 % interest rate per annum on the deposit.

It will be used by the RBI to absorb excess liquidity from the market.

What is the difference between Reverse Repo Rate and SDF

The Reverse  Repo Rate is also a mechanism by which RBI absorbs excess liquidity from the market. In Reverse Repo the banks also deposit their excess liquidity with the RBI for a short term period. 

However in reverse repo rate the when the banks deposit their liquidity with RBI, the RBI has to provide a collateral (security) mainly, government securities to the banks. 

In SDF there is no need for any collateral (security).

Interest Rate on SDF 

The Interest rate on the SDF will be 0.25% less than the  Repo rate. 

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 will meet on June 6-8, August 2-4, September 28-30, and December 5-7, and the final meeting on February 6-8, 2023.