RBI- Monetary policy update

Subject : Economy

Section : Monetary Policy

Context:

The Monetary Policy Committee (MPC) today stepped up its inﬂation ﬁght , with its members unanimously voting for an increase in the policy repo rate by 50 basis points.
The MPC move comes a little over a month after the six- member Committee unanimously voted for a 40 basis points hike in the repo rate in an oﬀ cycle meeting on May 4.

Current repo rate and inflation projections:

Following the latest hike, the repo rate is now 4.9 per cent up from 4.4 per cent. This will make bank loans (retail and MSME) linked to external benchmark rates such as the repo rate dearer.
RBI revised its retail inflation projection for FY23 sharply upwards to 6.7 per cent (assuming a normal monsoon and average crude oil price — Indian basket — of $105 per barrel) from earlier projection of 5.7 per cent.

Liquidity stanching:

Along with the increase in the repo rate, the MPC also de- cided unanimously to remain focussed on withdrawal of accommodation stance to ensure that inﬂation remains within the target (of 4 per cent within a band of +/- 2 per cent) going forward, even while supporting growth.

SDF, MSF rates up:

Following the 50 basis points hike in repo rate, the standing deposit facility (SDF) rate has moved up to 4.65 per cent (4.15 per cent earlier); and the marginal standing facility (MSF) rate to 5.15 per cent (4.65 per cent).
Under SDF, banks can park surplus liquidity with the RBI, overnight or for longer tenors.
Under the MSF, banks can get funds from the RBI on overnight basis against their excess statutory liquidity ratio (government securities and state development loans) holdings.

To ease pressure on rupee:

The policy tightening is also warranted to reduce the pressure on the rupee from widening the Current Account Deficit (CAD) and stem foreign portfolio outflows.

Retains GDP growth