Normally the Reserve Bank of India declares its Monetary policy every two months. Last policy was announced on April 8. 2022. However, this time it has not waited till the scheduled meeting of the Monetary Policy Committee to be held in June and so everyone was surprised as to how come a revision in the policy rates was announced in the first week of May, 2022. Before we talk about the main features of recent Monetary Policy of the Reserve Bank of India, May , 2022, let us discuss some basic Fundas about the Indian Monetary Policy:
Why do we have a Monetary policy Framework in India?
According to the Preamble of the Reserve Bank of India Act, 1934, the it is essential to have a modern monetary policy framework to meet the challenge of an increasingly complex economy.
Why does the RBI announce Monetary Policy?
According to the preamble of the Reserve Bank of India Act, 1934, the monetary policy framework in India is to be operated by the Reserve Bank of India.
What are the objectives of the Monetary Policy?
The primary objective of the monetary policy is to maintain price stability while keeping in mind the objective of growth
How many meetings of the monetary policy committee are held every year?
As per Section 45 Z I of Reserve Bank of India Act, 1934, the Central Bank has to organise at least four meetings of the Monetary Policy Committee in a year.
How do we know when the MPC of the RBI shall meet in the year 2022-23?
The RBI has to publish the meeting schedule of the Monetary Policy Committee to be held in a financial year at least one week before the first meeting in that year.
So what are the dates on which the MPC is scheduled to meet?
On March 30, 2022, the RBI informed that the MPC shall meet six times during the financial year 2022-23 on the following dates:
| S.N. | MPC Meeting Schedule |
| 1. | April 6 – 8, 2022 |
| 2. | June 6 – 8, 2022 |
| 3. | August 2 – 4, 2022 |
| 4. | September 28 – 30, 2022 |
| 5. | December 5 – 7, 2022 |
| 6. | February 6 – 8, 2023 |
Why then RBI has declared a monetary policy on May 4?
As per the Act, The RBI can change the meeting schedule in two circumstances:
- By way of a decision taken at a prior meeting of the Monetary Policy Committee; or
- If, in the opinion of the Governor, an additional meeting is required , or a meeting is required to be rescheduled due to administrative exigencies.
What new announcements are made in this surprise meeting?
The RBI raised the repo rate form 4 per cent to 4.4 per cent. Repo rate is the rate at which the commercial banks borrow money from the RBI under the Liquidity Adjustment Facility. Consequently, the standing deposit facility (SDF) rate has been increased from 3.75 per cent to 4.15 per cent. Further, under the Standing Deposit facility, the banks can place deposits with the RBI on an overnight basis. The marginal standing facility (MSF) rate and the Bank Rate both were raised from 3.25 per cent to 4.65 per cent.
What changed so much in the last one month that the RBI had to increase the policy rates?
To understand the dynamics of the monetary policy we may have to consider the global and domestic forces that have a bearing on the direction it takes.
Challenges posed by the Global Economy
The last policy stance was declared in April 2022, The RBI observes that the global economic and financial environment has only worsened since then.
- The disruptions, shortages and escalating prices induced by the geopolitical tensions and sanctions have persisted and become rather more intense
- The International Monetary Fund (IMF) has revised down its forecast of global output growth for 2022 by 0.8 percentage point to 3.6 per cent,
- The World Trade Organization has scaled down projection of world trade growth for 2022 by 1.7 percentage points to 3.0 per cent.
Loads of positives in the domestic economy
The positives in the India Economy have only improved since April 2022 as discussed more elaborately in my previous Article published on April 12, 2022.
- Domestic economic activity stabilized in March-April
- Urban demand appears to have maintained expansion but some weakness persists in rural demand. Investment activity seems to be gaining traction.
- Merchandise exports recorded double digit expansion for the fourteenth consecutive month in April. Non-oil non-gold imports also grew robustly on the back of improving domestic demand.
- Overall system liquidity remained in large surplus. Bank credit rose (y-o-y) by 11.1 per cent as on April 22, 2022.
- India’s foreign exchange reserves declined marginally by US$ 6.9 billion in 2022-23 (up to April 22) to US$ 600.4 billion.
Rising Inflationary pressures is the main concern
The RBI thinks that inflationary pressures may continue to haunt the global economy and the Indian economy may feel the heat in the coming months.
- In March 2022, headline CPI inflation surged to 7.0 per cent from 6.1 per cent in February, largely reflecting the impact of geopolitical spillovers.
- inflation increased by 154 basis points to 7.5 per cent and core inflation rose by 54 bps to 6.4 per cent.
- The rapid rise in inflation is occurring in an environment in which inflationary pressures are broadening across the world.
- The IMF projects inflation to increase by 2.6 percentage points to 5.7 per cent in advanced economies in 2022 and by 2.8 percentage points to 8.7 per cent in emerging market and developing economies
- International crude oil prices remain high but volatile, posing considerable upside risks to the inflation trajectory through both direct and indirect effects.
Who will be adversely affected by the increase in Policy rates?
Those who have taken or plan to take loans to finance part of their operational expenses or plant, property and equipment as the Banks may increase their lending rates.
Who will benefit from the increase in policy rates?
Those who have or planned to put their surplus money in the fixed deposits as Banks may eventually raise the interest rate on FDs.
Increase in Policy rates is an effort to prevent further escalation in prices
The RBI has gone for revision in the policy rates after keeping them stable at 4% for a long period following an accommodative monetary policy supporting growth in the pandemic hit Indian economy. But still , striking balance between growth and keeping inflation under control is a tough task
Flip side of the policy rates revision
Increase in policy rates may aggravate cost-push inflation. The RBI is hoping to suck the excess liquidity from the financial system. But it may also have to be careful that the rising interest rates may not further aggravate the already stressed out industrial input costs.