<\/p>\n
News<\/span><\/b>: Recently, contrary to the <\/span>predominant market expectations<\/span><\/b> that the status quo will be maintained by RBI on the monetary policy, the <\/span>Monetary Policy Committee (MPC<\/span><\/b>)<\/span> s<\/span>urprised everyone. The body has reinforced the <\/span>de facto normalisation<\/span><\/b>, which had already started in November 2021.<\/span>\u00a0<\/span><\/p>\n The Liquidity Adjustment Facility (LAF) corridor has been <\/span>narrowed back<\/span><\/b> to the <\/span>conventional 0.25 percentage points<\/span><\/b>. Earlier, the corridor was extraordinarily widened due to a pandemic in late March 2020.\u00a0<\/span>\u00a0<\/span><\/p>\n The RBI has fixed the rate of the newly introduced <\/span>Standing Deposit Facility<\/span><\/b> (SDF) <\/span>a<\/span>t 3.75% . The facility will absorb excess liquidity available with the commercial banks without any requirement of collateral instruments.<\/span>\u00a0<\/span><\/p>\n Now, the priority of the monetary policy has been changed. It will now focus on\u202f<\/span>CPI inflation managemen<\/span><\/b>t (target of 4% +\/- 2%), growth and financial stability. The <\/span>extraordinary accommodation approach <\/span><\/b>will be withdrawn.<\/span><\/p>\n There has been uncertainty over <\/span>growth<\/span><\/b> of the Indian economy. The <\/span>demand<\/span><\/b> has been concentrated at the upper-income level of households. <\/span>Inflation<\/span><\/b> has emerged as a big concern.\u00a0<\/span>\u00a0<\/span><\/p>\n (1)<\/strong> Apart from high crude <\/span>oil prices<\/span><\/b>, commodity prices have increased across the board, say, gas, metals, minerals, commodities, food, gold, etc. This will lead to strong <\/span>inflationary pressures<\/span><\/b>.\u00a0<\/span>\u00a0<\/span><\/p>\n (2)<\/strong> India\u2019s real GDP growth projection has been reduced from 7.8% to 7.2% for FY23 due to supply disruptions, slowing down of global economy and trade, high prices and financial markets volatility.\u00a0<\/span>\u00a0<\/span><\/p>\n (3)<\/strong> There seems to be <\/span>demand destruction<\/span><\/b> in the Indian economy as a result of <\/span>continuing high inflation<\/span><\/b>.\u00a0<\/span>\u00a0<\/span><\/p>\n (4)<\/strong> There has been an issue of <\/span>financial stability<\/span><\/b>. This is being challenged by uncertainty in the interest rate, and foreign exchange rates, market volatility, banking sector asset stress, and so on.\u00a0<\/span>\u00a0<\/span><\/p>\n (5)<\/strong> The RBI\u2019s Open Market Operations (OMOs) are required to prevent more liquidity in the market. RBI wants <\/span>money supply<\/span><\/b> and <\/span>system liquidity management<\/span><\/b>. It is because the Central and state government\u2019s <\/span>large borrowing programme<\/span><\/b> will increase the interest rates on sovereign bonds.\u00a0<\/span>\u00a0<\/span><\/p>\n First, <\/span>interest rates<\/span><\/b> will begin to increase. For bank borrowers, this is likely to be a very gradual process. For corporates and other wholesale borrowers, who also borrow from bond markets, this increase is likely to be faster.\u00a0<\/span>\u00a0<\/span><\/p>\n Second, around 40% of bank loans are now linked to external benchmarks (like the repo rate). Therefore, Interest rates on bank credit will rise faster.\u00a0\u00a0<\/span>\u00a0<\/span><\/p>\n A relatively <\/span>loose fiscal policy<\/span><\/b> can offset some of this <\/span>reduced demand<\/span><\/b>. The government can continue its subsidies to lower-income households.<\/span>\u00a0<\/span><\/p>\n Source<\/span><\/b>: The post is based on an article \u201cRBI shift on monetary policy<\/strong>\u201d published in the Indian Express<\/strong> on 09<\/strong><\/span>th April 2022.<\/strong>\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":" News: Recently, contrary to the predominant market expectations that the status quo will be maintained by RBI on the monetary policy, the Monetary Policy Committee (MPC) surprised everyone. The body has reinforced the de facto normalisation, which had already started in November 2021.\u00a0 What has been announced by the RBI?\u00a0 The Liquidity Adjustment Facility (LAF)… Continue reading RBI shift on monetary policy<\/span><\/a><\/p>\n","protected":false},"author":10328,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[216,10500],"class_list":["post-178509","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-gs-paper-3","tag-indian-express","entry"],"jetpack_featured_media_url":"","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/178509","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10328"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=178509"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/178509\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=178509"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=178509"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=178509"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}What has been announced by the RBI?<\/span><\/b>\u00a0<\/span><\/h5>\n
What are the reasons for unexpected tightening?<\/span><\/b>\u00a0<\/span><\/h5>\n
What are the implications of monetary policy tightening like repo rate hike?<\/span><\/b>\u00a0<\/span>\u00a0<\/span><\/h5>\n
Way Forward<\/span><\/b>\u00a0<\/span><\/h5>\n