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Monetary Policy Review: RBI

Monetary Policy Review: RBI

The Reserve Bank of India (RBI) in its latest Monetary Policy review has decided to keep the main policy rate – Repo rate – unchanged at 4%.

  • It has also retained its accommodative stance, but indicated it will engage in a gradual and calibrated withdrawal of surplus liquidity to rein in inflation.

Monetary Policy Review:

  • In the wake of the rise in crude oil and commodity prices and the impact of the Russian invasion of Ukraine, RBI has slashed the growth forecast to 7.2% for fiscal 2022-23 from 7.8% projected earlier.
  • The Russia-Ukraine war could potentially impede the economic recovery through elevated commodity prices and global spill-over channels.
  • The RBI also introduced a new measure, the Standing Deposit Facility an additional tool for absorbing liquidity to suck out surplus liquidity of Rs 8.5 lakh crore from the financial system which is fuelling inflation.
  • This Monetary Policy Review signals that the RBI has finally shifted its priorities to tackle inflation.
  • Thus, there is a possibility of a hike in its key policy rate (Repo Rate) in the coming months.
  • Further, RBI has hiked its inflation forecast from 4.5% projected earlier to 5.7% still below the upper band of 6% of the RBI’s target – in 2022-23.
  • RBI policy panel took a concrete step by restoring the policy rate corridor under Liquidity Adjustment Facility(LAF) to pre-pandemic width of 50 basis points.
  • This is aimed at bringing down the inflationary pressures.
  • LAF is a tool used in the monetary policy that allows banks to borrow money from the RBI through repurchase agreements (Repo) or to lend funds to the RBI through reverse repo agreement.