RBI Monetary Policy 2022

The monetary policy is a policy formulated by the central bank, i.e., RBI (Reserve Bank of India) and relates to the monetary matters of the country. The policy involves measures taken to regulate the supply of money, availability, and cost of credit in the economy.

The policy also oversees distribution of credit among users as well as the borrowing and lending rates of interest. In a developing country like India, the monetary policy is significant in the promotion of economic growth.

The various instruments of monetary policy include variations in bank rates, other interest rates, selective credit controls, supply of currency, variations in reserve requirements and open market operations.

Key Indicators
Indicator Current rate
CRR 3%
SLR 18.00%
Repo rate 4.40%
Reverse repo rate 3.75%
Marginal Standing facility rate 4.65%
Bank Rate 4.65%

Objectives of Monetary Policy

While the main objective of the monetary policy is economic growth as well as price and exchange rate stability, there are other aspects that it can help with as well.

  • Promotion of saving and investment: Since the monetary policy controls the rate of interest and inflation within the country, it can impact the savings and investment of the people. A higher rate of interest translates to a greater chance of investment and savings, thereby, maintaining a healthy cash flow within the economy.
  • Controlling the imports and exports: By helping industries secure a loan at a reduced rate of interest, monetary policy helps export-oriented units to substitute imports and increase exports. This, in turn, helps improve the condition of the balance of payments.
  • Managing business cycles: The two main stages of a business cycle are boom and depression. The monetary policy is the greatest tool using which the boom and depression of business cycles can be controlled by managing the credit to control the supply of money. The inflation in the market can be controlled by reducing the supply of money. On the other hand, when the money supply increases, the demand in the economy will also witness a rise.
  • Regulation of aggregate demand: Since the monetary policy can control the demand in an economy, it can be used by monetary authorities to maintain a balance between demand and supply of goods and services. When credit is expanded and the rate of interest is reduced, it allows more people to secure loans for the purchase of goods and services. This leads to the rise in demand. On the other hand, when the authorities wish to reduce demand, they can reduce credit and raise the interest rates.
  • Generation of employment: As the monetary policy can reduce the interest rate, small and medium enterprises (SMEs) can easily secure a loan for business expansion. This can lead to greater employment opportunities.
  • Helping with the development of infrastructure: The monetary policy allows concessional funding for the development of infrastructure within the country.
  • Allocating more credit for the priority segments: Under the monetary policy, additional funds are allocated at lower rates of interest for the development of the priority sectors such as small-scale industries, agriculture, underdeveloped sections of the society, etc.
  • Managing and developing the banking sector: The entire banking industry is managed by the Reserve Bank of India (RBI). While RBI aims to make banking facilities available far and wide across the nation, it also instructs other banks using the monetary policy to establish rural branches wherever necessary for agricultural development. Additionally, the government has also set up regional rural banks and cooperative banks to help farmers receive the financial aid they require in no time.

Flexible Inflation Targeting Framework (FITF)

The Flexible Inflation Targeting Framework (FITF) was introduced in India post the amendment of the Reserve Bank of India (RBI) Act, 1934 in 2016. In accordance with the RBI Act, the Government of India sets the inflation target every 5 years after consultation with the RBI. While the inflation target for the period between 5 August 2016 and 31 March 2021 has been determined to be 4% of the Consumer Price Index (CPI), the Central Government has announced that the upper tolerance limit for the same will be 6% and the lower tolerance limit can be 2% for the same.

In this framework, there are chances of not achieving the inflation target fixed for a particular amount of time. This can happen when:

  • The average inflation is greater than the upper tolerance level of the inflation target as predetermined by the Central Government for 3 quarters in a row.
  • The average inflation is less than the lower tolerance level of the target inflation fixed by the Central Government beforehand for 3 consecutive quarters.
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Monetary Policy Tools

To control inflation, the Reserve Bank of India needs to decrease the supply of money or increase cost of fund in order to keep the demand of goods and services in control.

Quantitative tools –

The tools applied by the policy that impact money supply in the entire economy, including sectors such as manufacturing, agriculture, automobile, housing, etc.

  1. Reserve Ratio:

    Banks are required to keep aside a set percentage of cash reserves or RBI approved assets. Reserve ratio is of two types:

    Cash Reserve Ratio (CRR) – Banks are required to set aside this portion in cash with the RBI. The bank can neither lend it to anyone nor can it earn any interest rate or profit on CRR.

    Statutory Liquidity Ratio (SLR) – Banks are required to set aside this portion in liquid assets such as gold or RBI approved securities such as government securities. Banks are allowed to earn interest on these securities, however it is very low.

  2. Open Market Operations (OMO):

    In order to control money supply, the RBI buys and sells government securities in the open market. These operations conducted by the Central Bank in the open market are referred to as Open Market Operations.

    When the RBI sells government securities, the liquidity is sucked from the market, and the exact opposite happens when RBI buys securities. The latter is done to control inflation. The objective of OMOs are to keep a check on temporary liquidity mismatches in the market, owing to foreign capital flow.

Qualitative tools:

Unlike quantitative tools which have a direct effect on the entire economy’s money supply, qualitative tools are selective tools that have an effect in the money supply of a specific sector of the economy.

  1. Margin requirements – The RBI prescribes a certain margin against collateral, which in turn impacts the borrowing habit of customers. When the margin requirements are raised by the RBI, customers will be able to borrow less.
  2. Moral suasion – By way of persuasion, the RBI convinces banks to keep money in government securities, rather than certain sectors.
  3. Selective credit control – Controlling credit by not lending to selective industries or speculative businesses.

Market Stabilisation Scheme (MSS) -

Policy Rates:

  1. Bank rate – The interest rate at which RBI lends long term funds to banks is referred to as the bank rate. However, presently RBI does not entirely control money supply via the bank rate. It uses Liquidity Adjustment Facility (LAF) – repo rate as one of the significant tools to establish control over money supply.

    Bank rate is used to prescribe penalty to the bank if it does not maintain the prescribed SLR or CRR.

  2. Liquidity Adjustment Facility (LAF) – RBI uses LAF as an instrument to adjust liquidity and money supply. The following types of LAF are:
    1. Repo rate: Repo rate is the rate at which banks borrow from RBI on a short-term basis against a repurchase agreement. Under this policy, banks are required to provide government securities as collateral and later buy them back after a pre-defined time.
    2. Reverse Repo rate: It is the reverse of repo rate, i.e., this is the rate RBI pays to banks in order to keep additional funds in RBI. It is linked to repo rate in the following way:

      Reverse Repo Rate = Repo Rate – 1

  3. Marginal Standing Facility (MSF) Rate: MSF Rate is the penal rate at which the Central Bank lends money to banks, over the rate available under the rep policy. Banks availing MSF Rate can use a maximum of 1% of SLR securities.

    MSF Rate = Repo Rate + 1

Monetary Policy Transmission

Borrowers fail to fully benefit from RBI’s repo rate cut due to the following reasons:

  • Banks are not affected by RBI rate cuts as the Central Bank is not their primary money supplier.
  • Deposits already made are fixed at the rates when taken and cannot be reduced; the rate cuts will only reflect in the new deposit rates.
  • PPF, Post Office accounts and other small saving instruments are available at high administered interest rates and in case of reduction of bank deposit rates, customers have the choice to move to those funds.
  • Banks do not prefer to lower their rates as high lending rates keep their profit margins up.
  • India does not have a well-developed corporate bond market, therefore corporate customers have little choice but to reach out to banks for borrowing.

Steps to improve monetary transmission:

Both the government and RBI has taken and plans to take some steps in order to accelerate the transmission of monetary policy.

  • Government intends to bring down the interest rates on small saving accounts. If the small saving rates are linked to the bank rate, this could serve as a permanent solution.
  • In order to improve monetary transmission, RBI wants banks to change the calculation methodology of base rate to marginal cost of funds from average cost of funds.

Despite banks raising the lending rates immediately after RBI’s rate cuts, the Central Bank is unable to control inflation due to the following reasons:

  • Financial deficit in the higher government.
  • Issues at the supply side, such as crude oil prices, issues in agri marketing, etc.
  • Lack of financial inclusion as borrowers still depend on moneylenders, who are not under RBI’s control.
  • Non-monetised economy in certain rural areas.

Dear Money Policy or Contractionary Monetary Policy:

Dear money policy is a policy when money become more expensive with the rise of interest rate. Due to this, the supply of money also decreases in the economy, therefore it is also referred to as the contractionary monetary policy.

This policy leads to a drop in business expansions owing to a high cost of credit, as well as a fall in business expansion. This in turn affects employment as it brings down growth rates. Therefore, interest rate cuts such as SLR and CRR are preferred by the government and the corporates.

Fiscal Policy:

A policy set by the finance ministry that deals with matters related to government expenditure and revenues, is referred to as the fiscal policy. Revenue matter include matters such as raising of loans, tax policies, service charge, non-tax matters such as divestment, etc. While expenditure matters include salaries, pensions, subsidies, funds used for creating capital assets like bridges, roads, etc.

Demand Pull Inflation:

This is a state when people have excess money to buy goods in the market. RBI practises easier control on this as it can lead to a fall in money supply in the economy, which in turn would mean a drop in the prices.

Supply Side Inflation:

Inflation in the economy owing to constraints in the supply side of goods in the market. This cannot be controlled by RBI as it does not control prices of commodities. The government plays an important role in this case through fiscal policy.


The Reserve Bank of India had reduced the repo rate and reverse repo rate to 4.40% and 4.00% on 27 March. However, with coronavirus pandemic hurting the economy, the central bank has reduced the reverse repo rate by another 25 basis points on 17 April. Following the reduction, the reverse repo rate stands at 3.75%.

On 27 March, the central bank had reduced the Marginal Standing Facility (MSF) rate and the bank rate to 4.65% respectively.

News About RBI Monetary Policy

  • RBI keeps repo rate unchanged

    The Reserve Bank of India (RBI) made no changes to the repo rates the seventh straight time and announced that the GDP growth target is to be at 9.5%. RBI also said that India is doing much better economically as compared to how it was doing in June 2021.

    The repo rate remained unchanged at 4% and the reverse repo rate at 3.35%, the RBI Governor Shaktikanta Das said.

    6 August 2021

  • Further rise in MCLR less likely as deposit rates stabilise

    The system deposit and average lending rates according to Reserve Bank of India’s data for the month of June continued to show a flat trend for the sector. The trend observed was similar for both public and private banks. The deposit rates for private banks which was constantly rising started becoming stable in the month of June 2018. The gap between fresh loans and outstanding weighted average lending rate continued to drop but continues to still be negative. In the medium term, it is expected that the net interest margin will continue to persist. Term deposit rates of banks rose to 6.7 percent in March 2018 but has managed to remain stable since then. The private banks however has seen a consistent rise in the last six months and started to slow down a bit by 5 bps for June 2018. A similar was followed by wholesale deposit cost. This improvement will however not have a good impact on the NIM outlook as the banks focus more towards lending to low-yielding segments that are closer to the MCLR. As the deposit rates have started to stabilise, it is less that the MCLR will continue to increase at such a swift pace.

    21 August 2018

  • How the RBI repo rate hike can affect your personal loan EMIs

    The Reserve Bank of India (RBI) has increased the repo rate by 25 basis points. This is the first time the repo rate was increased after the current government took charge. RBI governor, Urjit Patel held a meet for 3 days with a 6-member Monetary Policy Committee before the rate hike was announced.

    The increase in repo rate was primarily due to factors that pressurised India’s Consumer Price Index (CPI). The hike in repo rate will have a definitive impact on the interest rates offered by banks on loans. The primary effect this will have on the borrower is an increase in his/her vehicle/home/personal loan EMIs.

    The repo rate is currently 6.25%, as opposed to the previous 6%. The reverse repo rate under the Liquidity Adjustment Facility (LAF) is 6%. The Marginal Standing Facility (MSF) rate and Bank rate is 6.50% as well.

    7 June 2018

  • Umesh Yadav, KL Rahul and Others Recruited by the RBI to Promote Financial Literacy

    The IPL season, which ended recently, saw a handful of cricketers get selected by the Reserve Bank of India for the promotion of their services as well as for spreading a message about financial literacy. Cricketers such as Ishan Kishan, KL Rahul, Dhruv Shorey, Umesh Yadav, Deepak Hooda and Shahbaz Nadeem were all featured in an advertisement over the course of the IPL season. They advertised the rules of savings account schemes offered by the Reserve Bank of India. Advertising experts believe that this is a good move considering the large fan-following that cricket enjoys in India, and they expect people across the country to learn more about finances and the management of finances.

    6 June 2018

  • Allahabad Bank focuses on technology upgradation

    On 24 April 2018, Allahabad Bank which is a Kolkata-based bank, celebrated its 154th Foundation Day. The celebration included activities such as donating school uniforms and books to female children of janitorial workers in India, planting saplings, and conducting blood donation camps. Other celebratory activities included honoring famous personalities in the field of culture and arts, and sports who have dedicated themselves to social causes. Being a customer-centric bank, the current focus is on technology upgradation in order to enhance the convenience and safety of the bank’s customers. Allahabad Bank has cut its BPLR and base rate by 45 bps to 13.40% and 9.15%, respectively.

    27 April 2018

  • Amidst hardening global crude oil prices, RBI likely to leave policy rates unchanged

    The Reserve Bank of India (RBI) is expected to retain the current interest rates in its bi-monthly policy review for the fiscal year 2018-19. The price of crude oil is solidifying at $70 per barrel which poses a risk to inflation. The MPC meeting on 5 April 2018 will be the first bi-monthly monetary policy review of FY2018-19. The Monetary Policy Committee consisting of 6 members will meet on 4 and 5 April to review the monetary policy, led by Urjit Patel, the Governor of RBI. Bank of America Merrill Lynch opined that it expects RBI to maintain status quo with the March quarter inflation likely at 4.6% but cut key policy rates in the August review provided the monsoons prove to be favourable. In addition to crude oil prices, another factor that may affect inflation is the government's decision to offer 1.5 times the Minimum Support Price to farmers for their produce. The current repo rate is 6%, the Marginal Standing Facility rate is 6.5%, the bank rate is 6.25%, and the reverse repo rate is 5.75%.

    5 April 2018

  • RBI and Centre announced H1 borrowing in their weekly bond issue calendar

    The Reserve Bank of India (RBI) and the Centre had decided on the borrowing during the April-September period on the 24th of March, which they announced on the 26th of March. The borrowing calendar with the details of the issue of bonds per week by the RBI are now available. According to the Budget Estimate, the Centre’s net borrowing is Rs.4.07 trillion for the financial year 2018-19 compared to the Revised Estimates of Rs.4.8 trillion in 2017-18. The BE was Rs.3.5 trillion for the financial year 2017-18.

    28 March 2018

  • NPA divergence likely to increase after RBI audits all banks

    ICRA, the credit rating agency has said that the asset quality of Indian banks could be weakened due to the divergences in asset quality and their consequent recognition as the Reserve Bank of India is yet to complete risk-based supervision (RBS) for all banks for FY17. While carrying out the Annual Financial Inspections of the banks, RBI found divergence between the NPAs and provisions declared by the banks and the ones assessed during the inspection. As on 31 March 2017, the ICRA estimated that the gross NPA stood at Rs.54,100 crore for banks for which RBS audit was done. RBI has issued a revised framework which requires banks to employ a resolution plan for special mention accounts. As there is an expectation of 6-7% annualised slippage during the 4th quarter of FY18, the gross NPA can increase to Rs.9.3 lakh crore by 31 March 2018 as per the ICRA estimates.

    14 March 2018

  • Syndicate Bank retains Marginal Cost of funds based Lending rate (MCLR)

    Syndicate Bank recently evaluated and assessed its Marginal Cost of funds based Lending rate (MCLR). One of the leading commercial banks of the nation, Syndicate Bank, has decided to not make any changes to the tenors. The rates will be maintained as follows: for an overnight tenor, the rate is 7.95%; for a 1-month tenor, the MCLR is 8%; for a tenor of 6 months, the rate is 8.25%; and for a tenor of 1 year, the rate is 8.45%.

    13 February 2018

  • Bank of Baroda in plans to raise capital funds

    On 18 December 2017, Bank of Baroda announced that it will hold a meeting on 22 December to approve additional capital funds raising in domestic or international market so as to be eligible as an Additional Tier-I Capital under BASEL-III norms. The funds is expected to be above Rs.3,000 crore which was previously approved in a meeting held by the board of Bank of Baroda in 27 May 2017.

    20 December 2017

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