RBI Monetary Policy: A Quick Rundown

RBI Monetary Policy- A Quick Rundown

RBI Governor Shaktikanta Das addressed the press on 5th August 2022, to present the Monetary Policy. Let’s quickly see a rundown of the Monetary Policy.

What’s Happening?

The RBI’s Monetary Policy Committee (MPC) sat for a three-day meeting on 3rd August 2022. On 5th August 2022, the governor of the Reserve Bank of India, Shaktikanta Das, addressed the press to announce the outcome of the Monetary Policy Meeting. 

But before the governor announced the monetary policy, the Indian rupee was strengthened by 46 paise to Rs 78.94 against the US dollar.

A Rundown On The Outcome of The Monetary Policy

Shaktikanta Das mentioned that India is naturally being impacted by the global situation and is grappling with high inflation. 

Later he announced the decision of the RBI’s Monetary Policy Committee. 

  • The RBI Monetary Policy Committee hiked the repo rate by 50 basis points to 5.4%, bringing it back to pre-pandemic levels. 
  • The Standing Deposit Facility (SDF) was adjusted to 5.15%. By doing so, the RBI will be able to absorb liquidity from commercial banks without giving government securities in return to the banks.
  • Marginal Standing Facility (MSF) and bank rates were revised to 5.65% from 5.15%. MSF is the rate at which the commercial bank borrows overnight funds from RBI, and the bank rate is the rate at which RBI grants long-term loans to commercial banks. Commercial banks will have to spend more on interest and hence will have a low lending capacity. This is another way RBI will absorb the excess liquidity from the economy. 
  • India faced a capital outflow of $13.3 billion. And the IMF has also projected downward economic growth and expressed the risk of recession, in the last few months.
  • The RBI governor said, ‘Inflation is expected to remain above the central bank’s 6% threshold in the second and third quarters of this fiscal year.’ 
  • The surplus liquidity in the banking system has come down to Rs 3.8 lakh crore, which was Rs. 6.7 lakh crore in April-May 2022. 
  • FY23 GDP forecast retained at 7.2%.
  • FY23 Consumer Price Index (CPI) inflation forecast is unchanged at 6.7%.
  • RBI’s MPC has proposed to enable Bharat Bill Payment System to accept cross-border inward bill payments. So that NRIs can pay home utility bills with ease. 

What Lies Ahead?

This was the third rate hike of the financial year 2022. The first rate hike was done in May when the MPC conducted an off-cycle meeting and hiked the repo rate by 40 basis points (0.40%). 

After experiencing that the inflation levels have skyrocketed, the MPC met again in June and hiked the repo rate by 50 basis points (0.50%). And this was the third meeting when the MPC hiked the repo rate again by 50 basis points (0.50%). 

Now the RBI is fighting two wars. First is the aggressive need to tame inflation and the other is to prevent the rupee from further depreciation.

Recently, the Consumer Price Index (CPI) inflation in India eased to 7.01% in June 2022, which was 7.4% in May 2022. But we are still above the RBI’s 6% threshold. 

If the RBI increases interest rates impulsively, it might harm the demand for loans and lead to another economic stress cycle. So, the next steps should be taken with caution.

Now let’s see how this rate hike impacts the economy. 

Until then, don’t forget to share this knowledge with your friends.

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