InvestorQ : What were the key highlights of the monetary announcement made by the RBI in its policy announcement on Friday 05th August 2022?
Niti Shenoi made post

What were the key highlights of the monetary announcement made by the RBI in its policy announcement on Friday 05th August 2022?

ishika Banerjee answered.
2 months ago

The RBI August policy began with a lot of hawkishness in-built. Already, the street was predicting rate hikes in the range of 25-35 bps but eventually the RBI chose to peg the rate hike at 50 bps. This takes the rates to well above the pre-COVID rate. It is hardly surprising considering that the US Fed has been extremely hawkish and even the Bank of England and the ECB have been hiking the rates much higher than expected. In these circumstances, the RBI did not really have much of a choice, but take a strong hawkish stance.

Here are the highlights of the RBI policy statement.

· The policy repo rate, which is the benchmark rate in the economy, has been raised by 50 basis points from 4.90% to 5.40%. The repo rate is now a good 25 basis points above the pre-COVID repo rate levels of 5.15%, showing genuine RBI hawkishness.

· As a result, the standing deposit facility (SDF) stands increased to 5.15% since it is pegged 25 basis points below the repo rate. The SDF replaced the revese repo rate and had also modified the spred to repo from -65 bps to -25 bps.

· The bank rate and the marginal standing facility (MSF) rate, which are pegged 25 bps above the repo rates, go up to 5.65% post the August 2022 repo rate hike. However, if one adds the 40 bps SDF hike, the effective hike is much larger.

· RBI refrained from making any changes to the CRR rate in the light of the objections coming from the banks. The CRR stays at 4.5%. Banks have complained against hiking CRR as it results in higher cost of funds.

· Inflation expectations for FY23 were kept static at 6.7% while the growth estimate for FY23 has been pegged at 7.2%. The RBI has been positive of maintaining the growth momentum despite constraints, while it believes the an improved Kharif output and tapering commodity prices would help rein in inflation at current levels.

· The members of the Monetary Policy Committee (MPC) voted to remain focused on withdrawal of accommodation in the ratio of 5:1 with Jayanth Varma dissenting to give such blanket commitments. However, all the six members of the MPC voted unanimously in favour of hiking the repo rates by 50 basis points to 5.40%.

With the latest rate hike, the RBI has hiked the rates by 140 bps since the start of May 2022. However, in terms of liquidity impact, there has been an additional 40 bps increase in the lower base of the SDF (formerly reverse repo) and a 50 bps hike in the CRR, which was done in the May special monetary policy.