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Key takeaways from MPC meeting: Repo, Reverse repo rates unchanged, SDF introduced

The policy panel slashed the GDP growth to 7.2 per cent and hiked the inflation forecast at 5.7 per cent for the fiscal 2022-23. These are the key takeaways from the MPC meeting.

RBI Governor Shaktikanta Das speaks on the RBI monetary policy, in Mumbai on Friday. (Photo: PTI)

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Friday left unchanged the key policy rate — Repo rate — at 4 per cent and the Reverse repo rate at 3.35 per cent.

However, the RBI introduced the Standing Deposit Facility (SDF) – an additional tool for absorbing liquidity – at an interest rate of 3.75 per cent. The central bank retained its accommodative policy stance but hinted that it will be less accommodative in the wake of elevated inflation levels.

The policy panel slashed the GDP growth to 7.2 per cent and hiked the inflation forecast at 5.7 per cent for the fiscal 2022-23. These are the key takeaways from the MPC meeting.

Repo rate remains unchanged

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The RBI decision to keep Repo rates unchanged at 4 per cent will help banks to keep interest rates in the financial system unchanged, aiding growth in the economy. Borrowers won’t have to shell out more on EMIs and loan repayments at least for the time being.

Reverse repo rate unchanged, SDF introduced

It has retained the reverse repo rate, the rate at which RBI borrows from banks, unchanged at 3.35 per cent.

A stable Reverse repo rate means that the central bank wants to retain the money, or liquidity, in the banking system. A hike would have signalled the start of the reversal of the monetary policy cycle that would eventually lead to a rise in rates.

“It (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,” the MPC said.

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The Standing Deposit Facility (SDF) will be an additional tool for absorbing liquidity without any collateral. Accordingly, the RBI has decided to institute the SDF with an interest rate of 3.75 per cent with immediate effect. The SDF, with an interest rate of 3.75 per cent, will replace the fixed rate reverse repo (FRRR) as the floor of the LAF corridor. Both the standing facilities – the MSF and the SDF – will be available on all days of the week, throughout the year.

Accommodative stance continues

It also decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

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While the current stance of “accommodative-policy-for-as-long-as-necessary-to-revive-growth” was up for a review, analysts said the RBI is likely to wait for some more time for the economic recovery to continue.

“The MPC decided unanimously to remain accommodative while focussing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth,” RBI Governor Shaktikanta Das said.

Brace for higher inflation, slower growth

The central bank has slashed the growth forecast to 7.2 per cent for fiscal 2022-23 from 7.8 per cent projected earlier in the wake of the rise in crude oil and commodity prices and the aftereffect of the Russian invasion of Ukraine. It has increased the retail inflation from 4.5 per cent projected earlier to 5.7 per cent in 2022-23.

“Escalating geopolitical tensions have cast a shadow on our economic outlook. The war could potentially impede the economic recovery through elevated commodity prices and global spillover channels,” Das said.

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War in Europe a challenge, but RBI is ready

Das said the conflict in Europe now poses a new and overwhelming challenge, complicating an already uncertain global outlook.

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“As the daunting headwinds of the geopolitical situation challenge us, the RBI is braced up and prepared to defend the Indian economy with all instruments at its command. As we have demonstrated over the last two years, we are not hostage to any rulebook and no action is off the table when the need of the hour is to safeguard the economy,” Das said.

“Our goals of price stability, sustained growth and financial stability are mutually reinforcing and we continue to be guided by this approach,” he said.

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First published on: 08-04-2022 at 12:46 IST
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