RBI’s hawkish stance


    In News

    • Recently, the Monetary Policy Committee (MPC) of the Reserve Bank of India hiked the policy repo rate by 50 basis points to 5.4 per cent, a three-year high owing to inflation concern.

    What is the Dovish and Hawkish View of Monetary Policy?

    • Dovish View of Monetary Policy
      • Doves support the idea of low-interest rates since they believe that it encourages economic growth.
      • They also argue that an increase in economic growth leads to a high rate of borrowing among the consumers, which encourages spending.
    •  Hawkish View of Monetary Policy
      • A Hawk or an inflation Hawk is a financial advisor or policymaker who believes that monetary policies should maintain high-interest rates to curb inflation.
      • They are primarily interested in high-interest rates as they relate to Fiscal policy.
      • Hawks are generally not concerned with economic growth but support an economy operating at a level below its full-employment equilibrium. 

    Major decisions taken by the Monetary Policy Committee


    • The RBI retained its inflation and GDP growth projections for the current fiscal year ending in March 2023 at 6.7% and 7.2%.
      • The standing deposit facility (SDF) rate is adjusted to 5.15%; and the marginal standing facility (MSF) rate and the Bank Rate to 5.65%.
    • Home Loans 
      • The home loan rates of some major lenders like State Bank of India will cross 8 per cent with this repo rate hike. 
      • The home loan rate linked to the external benchmark or the repo rate is 7.55 per cent for many lenders now.
    • Yield of the government bond
      • The yield of the 10-year government bond, which fell 17 basis points, ended 14 basis points higher to close at 7.30 per cent.
    • CPI inflation
      • The current 7 percent CPI inflation is unacceptable and unsustainable and there is a need to bring it back to 4 per cent, which is the target for the MPC.
    • Growth
      • It pointed towards improvement in urban demand while there were mixed signals on the rural side.
    • Manufacturing sector
      • Capacity utilisation in the manufacturing sector is now above its long-run average, signalling the need for fresh investment activity in additional capacity creation.
    • Incremental credit-deposit ratio
      • The incremental credit-deposit ratio has risen from 77.2 percent to 246.8 percent.
        • The incremental CD ratio is the portion of deposits that the banks use to extend loans. The ratio is an indication of the bank’s dependence on borrowed funds to fund its credit growth. 

    Future Prospects 

    •  RBI would have wanted to stay on course to overcome the prevailing challenges. 
    • RBI’s actions and efforts are to largely surmount the global headwinds that are driving inflation and to ensure inflation remains within target going forward.
    • The MPC’s actions are in line with the current global inflation scenario and has leaned in favour of anchoring inflationary expectations to work out solutions to free the growth potential of the economy,
    •  its future actions would depend upon the evolving situation.  

    Monetary Policy Committee (MPC)

    • Constituted by RBI under section 45ZB of the Reserve Bank of India (RBI) Act, 1934.
    • Chaired by the Governor of RBI
    • Mission: Fixing the benchmark policy interest rate (repo rate) to restrain inflation within the particular target level (2% to 6%)
    • MPC conducts meetings at least 4 times a year. 
    • The monetary policy is published after every meeting with each member explaining his opinions. 

    Instruments of Monetary Policy

    • Repo Rate: The interest rate at which the Reserve Bank provides liquidity under the liquidity adjustment facility (LAF) to all LAF participants against the collateral of government and other approved securities.
    • Standing Deposit Facility (SDF) Rate: The rate at which the Reserve Bank accepts non collateralized deposits, on an overnight basis, from all LAF participants. The SDF is also a financial stability tool in addition to its role in liquidity management. The SDF rate is placed at 25 basis points below the policy repo rate. With introduction of SDF in April 2022, the SDF rate replaced the fixed reverse repo rate as the floor of the LAF corridor.
    • Marginal Standing Facility (MSF) Rate: The penal rate at which banks can borrow, on an overnight basis, from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a predefined limit (2 per cent). This provides a safety valve against unanticipated liquidity shocks to the banking system. The MSF rate is placed at 25 basis points above the policy repo rate.
    • Liquidity Adjustment Facility (LAF): The LAF refers to the Reserve Bank’s operations through which it injects/absorbs liquidity into/from the banking system. 
    • Reverse Repo Rate: The interest rate at which the Reserve Bank absorbs liquidity from banks against the collateral of eligible government securities under the LAF. Following the introduction of SDF, the fixed rate reverse repo operations will be at the discretion of the RBI for purposes specified from time to time.
    • Bank Rate: The rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate acts as the penal rate charged on banks for shortfalls in meeting their reserve requirements (cash reserve ratio and statutory liquidity ratio). 
    • Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with the Reserve Bank as a percent of its net demand and time liabilities (NDTL) as on the last Friday of the second preceding fortnight that the Reserve Bank may notify from time to time in the Official Gazette.
    • Statutory Liquidity Ratio (SLR): Every bank shall maintain in India assets, the value of which shall not be less than such percentage of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight, as the Reserve Bank may, by notification in the Official Gazette, specify from time to time and such assets shall be maintained as may be specified in such notification (typically in unencumbered government securities, cash and gold).
    • Open Market Operations (OMOs): These include outright purchase/sale of government securities by the Reserve Bank for injection/absorption of durable liquidity in the banking system.