• By Elite Wealth
  • / April 8, 2022
  • / Article

Key Highlights: 

  • The MPC voted unanimously to keep the policy repo rate unchanged at 4% for the eleventh time.
  • Reverse repo rate remains unchanged at 3.35%.
  • The stance remained accommodative. CRR is maintained at 4%
  • The marginal standing facility (MSF) rate and the Bank rate remain unchanged at 4.25 per cent.
  • Projection for real GDP growth for FY23 reduced from 7.8% to 7.2%. Consisting Q1 at 16.2%, Q2 at 6.2%, Q3 at 4.1% and Q4 at 4.1% for FY23
  • Raised CPI inflation projection from 4.5% to 5.7% for FY23. This includes Q1 at 6.3%, Q2 at 5.1%, Q3 at 5.4% and Q4 at 5.1% for FY23. Crude Oil estimated at $100 per barrel for projection of CPI inflation
  • Liquidity adjustment facility corridor is restored to 50 basis points, the position that prevailed before the pandemic by introducing the standing deposit facility (SDF) as the floor of LAF (Liquidity Adjustment Facilities) corridor, which will be placed 25 basis points below the repo rate, i.e., at 3.75 per cent.
  • This would provide symmetry to the operating framework of monetary policy by introducing a standing absorption facility at the bottom (3.75%) of the LAF corridor, similar to the standing injection tool at the upper (4.25%) end of the corridor, namely the marginal standing facility (MSF). Thus, at both ends of the LAF corridor, there will be standing facilities – one to absorb and the other to inject liquidity.
  • Will withdraw excess liquidity of Rs. 8. 5 lakh crore over a multiyear period
  • Foreign exchange reserves stand at US$ 606.5 billion as on April 1, 2022
  • The risk weights for individual housing loans were rationalized in October 2020 by linking them only with loan to value (LTV) ratios for all new housing loans sanctioned up to March 31, 2022. It has been decided to extend the applicability of these guidelines till March 31, 2023.This will facilitate higher credit flow for individual housing loans.
  • Decided to enhance the present limit under Held to Maturity (HTM) category from 22 percent to 23 per cent of NDTL till March 31, 2023.
  • Proposed to make card-less cash withdrawal facility available across all banks and ATM networks using the UPI.

Outlook: 

India’s Monetary Policy Committee kept its key policy rate unchanged as anticipated by the market. The stance has been kept accommodative. However, there will also be withdrawal of accommodation keeping in mind inflationary concerns. Bond yields jumped sharply as RBI revised inflation projection steeply. The 10-year bond yield rose to 7.002 per cent a jump of 1.27 per cent from yesterday’s close at 6.996 per cent.

So far, to absorb the excess liquidity RBI had been conducting VRRR auctions to at rates which firmed up closer to the policy repo rate. By introducing SDF, the RBI has restored the Liquidity Adjustment Facility or LAF corridor with SDF at the base at 3.75 per cent and MSF at 4.25 per cent.  With repo window, it becomes difficult for RBI to provide such volume of government securities in return. In this sense, the Standing Deposit Facility (SDF) is a collateral free arrangement meaning that RBI need not give collateral.  Going forward, there is definitely a sign that interest rates will be raised and two repo rate hikes look very likely in the next two policies unless inflation comes down sharply.

Note:

Standing Deposit Facility allows the RBI to absorb liquidity (deposit) from commercial banks without giving government securities in return to the banks. In the present situation, the main arrangement for the RBI to absorb excess money with the banking system is the famous reverse repo mechanism. Under reverse repo (which is a part of the Liquidity Adjustment Facility), banks will get government securities in return when they give excess cash to the RBI.  An interest rate of reverse repo rate is also provided to banks.

(Source:indianeconomy.net)

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