RBI’s monetary policy review Highlights


    In News

    • Recently the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) unveiled its latest review of the monetary policy. 

    Major Highlights 

    • In the reviewed policy the RBI has 
      • Increase the policy repo rate under the liquidity adjustment facility (LAF) by 35 basis points to 6.25 percent with immediate effect.
      • Consequently, the standing deposit facility (SDF) rate stands adjusted to 6.00 percent and the marginal standing facility (MSF) rate and the Bank Rate to 6.50 percent.
      • Remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
      • Cut India’s GDP (gross domestic product) growth forecast for the current financial year, 
        • Scaled down GDP growth hopes for the year to 6.8% from 7%
      • Retained its inflation projection for 2022-23 at 6.7%
    • Expected Outcomes:
      • Lending rates of banks are expected to go up as the cost of funds is expected to rise further. 
        • EMIs on the vehicle, home, and personal loans will also rise. 
      • The external benchmark linked lending rate (EBLR) of banks will rise by 35 bps.
        • One basis point is one-hundredth of a percentage point— as such loans are linked to the Repo rate. 
      • Marginal cost of funds-based lending rates (MCLR), which accounts for 49.2 percent of the loans portfolio of banks, are also expected to move up. 
        • The hike will help in moderating inflation in the country.
      • Deposit rates are also expected to rise in the near future. 
    • Significance:
      • The RBI has hiked the policy rate in a bid to bring down inflation from the current level.
      • Capital flows to India will improve and external financing conditions will ease.


    • Inflation with low economic output:
      • Indian policymakers are facing an odd quandary. Over the past couple of years, India has had to deal with a scenario where inflation has been high even as economic output struggles to grow.
      • This has happened for a variety of reasons. 
        • COVID related disruptions:
          • In particular, India was already experiencing a severe growth slowdown before the Covid pandemic. 
          • This was made worse by the lockdowns during Covid.
        • Global issues:
          • Inflation has also shot up on account of supply disruptions, first due to the pandemic and then due to Russia’s war in Ukraine.
    • Prioritising Economic recovery:
      • For a while, the RBI has prioritised economic recovery but that has meant high inflation, which hurts the poor the most. 
      • In fact, since the start of 2022, inflation has been above the 6% mark
    • The biggest risks to the outlook continue to be the headwinds emanating from protracted geopolitical tensions, global slowdown and tightening of global financial condition
    • RBI’s hawkish stance:
      • Most observers saw the latest policy statement as “hawkish”.
        • The term “hawks” refers to central banks that have a very low threshold for tolerating variation from the targeted inflation level.
      • What makes the RBI’s current stance more “hawkish” is the RBI’s reference to “core inflation”.
        • The trouble is if core inflation is high, it takes a while to come down, because it implies that inflation has become broad-based (i.e., higher prices have seeped through all parts of the economy).
        • RBI traditionally targets the headline rate, which is moderating. 
        • Core inflation, on the other hand, is going up and thus, it may push the RBI to take a more hawkish stance from here on.

    Way Ahead 

    • The rupee, which has been resilient and stable, should be allowed to find its level and the central bank is only striving to rein in excessive volatility in the exchange rate.
    • We must deal with the current global hurricane with confidence and endurance

    More about the Inflation & Monetary tools

    • Responsibility & objective:
      • In India, the RBI is entrusted with the responsibility of devising monetary policy with the primary objective of maintaining price stability while keeping in mind the objective of growth.
    • About Inflation:
      • Maintaining the inflation level:
        • The central bank is supposed to target a 4% retail inflation level, although the RBI has the leeway of inflation going up to 6% or falling to 2% in any particular month. 
        • Some degree of inflation is desirable as it promotes economic activity.
      • Relation of growth & inflation:
        • Typically when an economy experiences fast economic growth — that is, there is a lot of demand in the economy — prices rise.
      • Drivers of Inflation:
        • Demand-pull Inflation: 
          • Increases in prices due to the gap between the demand (higher) and supply (lower).
        • Cost-push Inflation: 
          • Higher prices of goods and services due to increased cost of production.
        • Exchange Rates: 
          • Exposure to foreign markets is based on the dollar value. Fluctuations in the exchange rate have an impact on the rate of inflation.
        • Demand-supply gap: 
          • High demand and low production or supply of multiple commodities create a demand-supply gap, which leads to a hike in prices.
    • RBI’s Monetary tool to tackle inflation:
      • When inflation runs high, RBI raises the repo rate — the interest rate it charges banks when it lends them money. 
        • Doing this incentivizes savings and disincentives expenditure, thus curtailing overall demand and GDP. 
        • That, in turn, reduces the inflation rate.
      • In times of weak economic activity, RBI cuts the repo rate and by the reverse logic, boosts demand and economic output.
      • All these critical decisions about the repo rate are taken by the MPC, which meets once every two months to assess inflation and growth outlook.
    • Headline, core & retail inflation:
      • Headline inflation:
        • Headline inflation refers to the change in the value of all goods in the basket.
        • Headline inflation is more relevant for developing economies than developed economies.
      • Core inflation:
        • Core inflation is arrived at by removing the inflation in food and fuel from headline inflation. By removing food and fuel inflation (since these prices fluctuate more wildly), core inflation provides a more robust measure of inflation in the economy.
        • Core inflation is less volatile than headline inflation.
      • Retail inflation:
        • Retail inflation is the inflation (or rise in the general price level) that everyday consumers face.