RBI hikes Repo rate by 50 BPS, other policy rates are also gone up

RBI Governor Shaktikanta Das-headed six-member monetary policy committee (MPC) on Friday decided to raise the repo rate by 50 basis points and announced the withdrawal of the accommodative stance, largely in line with expectations, making it a non-event.

“On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting, today (August 5, 2022) decided to:

• Increase the policy repo rate under the liquidity adjustment facility (LAF) by 50 basis points to 5.40 per cent with immediate effect.

Consequently, the standing deposit facility (SDF) rate stands adjusted to 5.15 per cent and the marginal standing facility (MSF) rate, and the Bank Rate to 5.65 per cent.

• The MPC also decided to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth” states the Resolution of MPC for August 2022.

With this, the RBI has effectively raised rates by 180 basis points since April. The Governor, however, retained India’s GDP projection of 7.2 per cent.

With effect from 05.08.2022, the present policy rates are as under.

SDF is the new floor for policy rates introduced by RBI. The SDF rate is applied for which banks park their excess funds with the RBI without any collateral. Although, the earlier system of reverse repo rate will remain as part of 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