RBI Monetary Policy: May-2022 Repo

Question 1

What is the RBI’s primary mandate regarding inflation?

Answer 1

The RBI’s primary mandate is to maintain inflation within the Consumer Price Index (CPI) target range of 2-6%.

Question 2

Describe the factors that led to the emergency MPC meeting in May 2022.

Answer 2

Inflation had crossed the 7% mark, well above the RBI’s target range. This was largely due to external factors like the Russia-Ukraine crisis, which caused a spike in imported fertilizer and crude oil prices.

Question 3

What was the main outcome of the emergency MPC meeting in May 2022?

Answer 3

The MPC decided to increase the repo rate from 4% to 4.40% to combat inflation.

Question 4

Explain how changes in the repo rate impact the MSF and SDF rates.

Answer 4

MSF (Marginal Standing Facility): The MSF rate is automatically adjusted based on the repo rate. The formula is Repo Rate + 0.25%.
SDF (Standing Deposit Facility): The SDF rate is also automatically adjusted based on the repo rate. The formula is Repo Rate - 0.25%.

Question 5

Besides the repo rate increase, what other action did the RBI take in May 2022 to control inflation?

Answer 5

The RBI Governor increased the Cash Reserve Ratio (CRR) from 4% to 4.50%. This reduces the amount of loanable funds available to banks.

Question 6

How does increasing the CRR help to control inflation?

Answer 6

Reduces loanable funds: Banks have less money to lend.
Increases interest rates: Higher CRR leads to higher loan interest rates.
Discourages spending: Higher interest rates make borrowing more expensive, reducing demand for goods and services.
Controls inflation: Decreased demand helps to bring down inflation.

Question 7

Can the MPC decide on the CRR?

Answer 7

No, the MPC cannot change the CRR. This power lies solely with the RBI Governor.

Question 8

What is meant by an ‘accommodative stance’ in monetary policy? Does the RBI have a legal obligation to maintain it?

Answer 8

An accommodative stance implies a policy aimed at supporting economic growth, often through lower interest rates. The RBI has no legal obligation to maintain an accommodative stance; its primary legal obligation is to control inflation within the target range.