RBI Monetary Policy: April-2022 (SDF)

Question 1

What were the key decisions made by the RBI in their April 2022 monetary policy?

Answer 1

The RBI kept the following unchanged:

Repo rate: 4%
Reverse Repo Rate: 3.35%
MSF: 4.25%
Stance: Accommodative.
Crucially, the Standing Deposit Facility (SDF) was introduced.

Question 2

What is the policy corridor as of April 2022? Describe how it works.

Answer 2

The policy corridor now operates as follows:

MSF: Upper limit of the corridor (Repo + 0.25%)
Repo Rate: The central policy rate
SDF: Lower limit of the corridor (Repo -0.25%)

Question 3

How did the introduction of the Standing Deposit Facility (SDF) change the RBI’s policy tools?

Answer 3

The SDF provides the RBI with a new tool to absorb excess liquidity in the banking system without requiring the banks to provide collateral. This gives the RBI greater flexibility in managing liquidity.

Question 4

What does an “accommodative” monetary policy stance signify?

Answer 4

An accommodative stance indicates the RBI is focused on promoting growth. They do this by keeping interest rates low to encourage borrowing and spending.

Question 5

Define the following terms: Repo Rate, Reverse Repo Rate, Marginal Standing Facility (MSF)

Answer 5

Repo Rate: The rate at which the RBI lends money to commercial banks for short-term needs.
Reverse Repo Rate: The rate at which commercial banks park excess funds with the RBI.
Marginal Standing Facility (MSF): A facility that allows banks to borrow overnight from the RBI against government securities, at a slightly higher rate than the repo rate.