MPC Meeting Apr 2022: SDF to be the new floor for policy rates, Repo rate unchanged

The six-member Monetary Policy Committee (MPC) meeting headed by Reserve Bank of India (RBI) Governor Shaktikanta Das kept the repo rate unchanged at 4 per cent, while the newly introduced SDF rate has been set at 3.75%, higher than the 3.35% fixed reverse repo rate, which is the rate at which banks park their excess funds with the RBI without any collateral. Here’s what the Governor of RBI said.

RBI will restore the liquidity adjustment facility (LAF) corridor to 50 bps, as it was pre-Covid.

MSF rate and bank rate remain unchanged at 4.25 per cent.

Inflation is now projected at 5.7 per cent,

RBI has revised the FY23 GDP forecast to 7.2% from the earlier projection of 7.8%

The latest policy rates are as under.

SDF is the new floor for policy rates introduced by RBI. The SDF rate has been set at 3.75%, higher than the 3.35% fixed reverse repo rate, which is the rate at which banks park their excess funds with the RBI without any collateral. Although, the reverse repo rate will remain as part of the RBI’s toolkit and its operation will be at the discretion of the RBI for purposes specified from time to time, according to RBI’s announcement. This move of RBI makes the reverse repo rate redundant for now.

So far, RBI used three policy rates under the LAF corridor to manage its monetary policy operations, including the repo rate, at which it lends to banks, the reverse repo rate or the rate at which it drains excess liquidity from banks, and the marginal standing facility (MSF) rate at which RBI supplies liquidity when conditions are challenging. In 2018, the amended Section 17 of the RBI Act empowered the Reserve Bank to introduce the SDF – an additional tool for absorbing liquidity without any collateral. By removing the binding collateral constraint on the RBI, the SDF strengthens the operating framework of monetary policy. The SDF is also a financial stability tool in addition to its role in liquidity management.