Monetary Management and Financial Inter Mediation 2022-23 | Indian Economy for UPSC CSE PDF Download

 Page 1


CHAPTER
04
The year 2022 marked the return of high inflation, especially in advanced economies, 
after nearly four decades. Inflation did not spare emerging economies either. These 
developments led to an unprecedented, synchronous, and sharp cycle of monetary 
tightening across countries. Major central banks have implemented sharp increases in 
policy rates, with the Federal Reserve’s rate hikes being the steepest since the 1970s. 
While the Federal Reserve has raised policy rates by 425 basis points (bps), the European 
Central Bank (ECB) and the Bank of England (BoE) have implemented 300 bps and 
250 bps rate increases, respectively. The RBI initiated its monetary tightening cycle in 
April 2022 and has since implemented a policy repo rate hike of 225 bps. Consequently, 
domestic financial conditions began to tighten, which was reflected in the lower growth 
of monetary aggregates.
The change in RBI’s policy stance in FY23 led to a moderation of surplus liquidity 
conditions that prevailed during the pandemic years. Monetary policy transmission is 
well underway as lending and deposit rates increased following the hike in policy rates. In 
the government securities (G-sec) market, bond yields were on an upward trajectory until 
June 2022 on concerns of high inflation and policy rate hikes. These yields moderated 
in November and December 2022, aided by lower crude oil prices, a slower pace of rate 
hikes, and general moderation in global sovereign bond yields. 
While the global tightening cycle has contributed to a dampened global outlook, the 
domestic appetite for credit has been on an upswing. Non-food credit offtake by scheduled 
Commercial Banks (SCBs) has been growing in double digits since April 2022, with the 
increase being broad-based. Credit disbursed by Non-Banking Financial Companies 
(NBFCs) has also been on the rise. The balance sheet clean-up exercise has been vital in 
enhancing the lending ability of financial institutions. The Gross Non-Performing Assets 
(GNPA) ratio of SCBs has fallen to a seven-year low of 5.0, while the Capital-to-Risk 
Weighted Assets Ratio (CRAR) remains healthy at 16.0 and well above the regulatory 
requirement of 11.5. The health of NBFCs has continued to improve as well. The recovery 
rate for the SCBs through Insolvency and Bankruptcy Code (IBC) was highest in FY22 
compared to other channels.  
Political and economic developments in 2022 – the breakout of a conflict in Europe, 
high inflation and raising interest rates - meant that capital markets around the world 
were characterised by increased volatility. However, domestic capital markets displayed 
some encouraging trends. The primary equity markets witnessed participation from all 
segments, especially with increased Small and Medium Enterprises (SMEs) contributions 
MONETARY MANAGEMENT 
AND FINANCIAL INTER 
MEDIATION: A GOOD YEAR
Page 2


CHAPTER
04
The year 2022 marked the return of high inflation, especially in advanced economies, 
after nearly four decades. Inflation did not spare emerging economies either. These 
developments led to an unprecedented, synchronous, and sharp cycle of monetary 
tightening across countries. Major central banks have implemented sharp increases in 
policy rates, with the Federal Reserve’s rate hikes being the steepest since the 1970s. 
While the Federal Reserve has raised policy rates by 425 basis points (bps), the European 
Central Bank (ECB) and the Bank of England (BoE) have implemented 300 bps and 
250 bps rate increases, respectively. The RBI initiated its monetary tightening cycle in 
April 2022 and has since implemented a policy repo rate hike of 225 bps. Consequently, 
domestic financial conditions began to tighten, which was reflected in the lower growth 
of monetary aggregates.
The change in RBI’s policy stance in FY23 led to a moderation of surplus liquidity 
conditions that prevailed during the pandemic years. Monetary policy transmission is 
well underway as lending and deposit rates increased following the hike in policy rates. In 
the government securities (G-sec) market, bond yields were on an upward trajectory until 
June 2022 on concerns of high inflation and policy rate hikes. These yields moderated 
in November and December 2022, aided by lower crude oil prices, a slower pace of rate 
hikes, and general moderation in global sovereign bond yields. 
While the global tightening cycle has contributed to a dampened global outlook, the 
domestic appetite for credit has been on an upswing. Non-food credit offtake by scheduled 
Commercial Banks (SCBs) has been growing in double digits since April 2022, with the 
increase being broad-based. Credit disbursed by Non-Banking Financial Companies 
(NBFCs) has also been on the rise. The balance sheet clean-up exercise has been vital in 
enhancing the lending ability of financial institutions. The Gross Non-Performing Assets 
(GNPA) ratio of SCBs has fallen to a seven-year low of 5.0, while the Capital-to-Risk 
Weighted Assets Ratio (CRAR) remains healthy at 16.0 and well above the regulatory 
requirement of 11.5. The health of NBFCs has continued to improve as well. The recovery 
rate for the SCBs through Insolvency and Bankruptcy Code (IBC) was highest in FY22 
compared to other channels.  
Political and economic developments in 2022 – the breakout of a conflict in Europe, 
high inflation and raising interest rates - meant that capital markets around the world 
were characterised by increased volatility. However, domestic capital markets displayed 
some encouraging trends. The primary equity markets witnessed participation from all 
segments, especially with increased Small and Medium Enterprises (SMEs) contributions 
MONETARY MANAGEMENT 
AND FINANCIAL INTER 
MEDIATION: A GOOD YEAR
79 Monetary Management And Financial Inter Mediation: A Good Year
while primary private debt markets saw a growth in placements and resource mobilisation. 
While secondary capital market indices of the Nifty 50 and the S&P BSE Sensex were 
not immune to the volatility in Foreign Portfolio Investment (FPI) flows, they performed 
better than their peers between April and December 2022. Furthermore, net FPI flows 
turned positive in the quarter ending December 2022. The indices have displayed a 
decreasing trend in volatility as measured by the India Volatility Index (VIX) over this 
period. Both developments underscore India’s strong macroeconomic fundamentals and 
relatively buoyant demand outlook.
The increasing outreach of the banking sector and capital markets is reflected in the 
insurance and pension sectors. Insurance penetration in India has been steadily increasing, 
with life insurance penetration being above the emerging markets and global averages. 
Important government interventions and a conducive regulatory environment have 
supported the growth of the insurance market, which has seen increasing partnerships, 
product innovations, and vibrant distribution channels. India is poised to emerge as one 
of the fastest-growing insurance markets in the coming decade. The pension sector too has 
been taking rapid strides since the introduction of the National Pension Scheme (NPS), 
more recently, the Atal Pension Yojana (APY). The sector has witnessed a robust increase 
in the number of subscribers and assets under management (AuM). The expansion of 
the sector has been aided by government measures such as relaxation in CCS (Pension) 
Rules, integration of electronic Pension Payment Order (e-PPO) with DigiLocker, and 
relaxation in the timeline for submitting Digital Life Certificate.
As global central banks reaffirm their hawkish stances and telegraph ‘higher-for-longer’ 
policy rates in their battle against inflation, monetary conditions are expected to remain 
tight worldwide. Domestically, however, RBI’s support to growth will ensure adequate 
liquidity in financial markets. The growth in credit offtake is expected to sustain, and 
combined with a pick-up in private Capex, will usher in a virtuous investment cycle. The 
credit upcycle will also be aided by constant monitoring of the risks in the financial system 
by the regulators and their efforts to contain them. Strong macroeconomic fundamentals 
will underpin the return of global capital flows to India once the fog of uncertainty lifts. 
The financial system will play a key role in realising the objectives of Amrit Kaal.
Monetary developments
4.1 Inflationary pressures dominated the global economic landscape in FY23. The build-up of 
price pressures occurring in tandem with the economic recovery in FY22 from the pandemic was 
long viewed as transient. It was expected to abate as supply chains normalised. The debate on 
said transience was put to rest by the conflict that erupted in Europe in February 2022. It resulted 
in commodity prices soaring and added significantly to the prevailing inflationary pressures. 
This development has triggered the current sharp and synchronous monetary tightening cycle.  
Setting the context, this chapter will review India’s monetary developments and the performance 
of the financial system in the current financial year. It includes reviewing the monetary policy 
actions and their impact on system liquidity and evaluating the performance of the banking 
system, sectoral credit developments and various insolvency frameworks. Further, it looks into 
the capital market, insurance and pension sector developments.
Page 3


CHAPTER
04
The year 2022 marked the return of high inflation, especially in advanced economies, 
after nearly four decades. Inflation did not spare emerging economies either. These 
developments led to an unprecedented, synchronous, and sharp cycle of monetary 
tightening across countries. Major central banks have implemented sharp increases in 
policy rates, with the Federal Reserve’s rate hikes being the steepest since the 1970s. 
While the Federal Reserve has raised policy rates by 425 basis points (bps), the European 
Central Bank (ECB) and the Bank of England (BoE) have implemented 300 bps and 
250 bps rate increases, respectively. The RBI initiated its monetary tightening cycle in 
April 2022 and has since implemented a policy repo rate hike of 225 bps. Consequently, 
domestic financial conditions began to tighten, which was reflected in the lower growth 
of monetary aggregates.
The change in RBI’s policy stance in FY23 led to a moderation of surplus liquidity 
conditions that prevailed during the pandemic years. Monetary policy transmission is 
well underway as lending and deposit rates increased following the hike in policy rates. In 
the government securities (G-sec) market, bond yields were on an upward trajectory until 
June 2022 on concerns of high inflation and policy rate hikes. These yields moderated 
in November and December 2022, aided by lower crude oil prices, a slower pace of rate 
hikes, and general moderation in global sovereign bond yields. 
While the global tightening cycle has contributed to a dampened global outlook, the 
domestic appetite for credit has been on an upswing. Non-food credit offtake by scheduled 
Commercial Banks (SCBs) has been growing in double digits since April 2022, with the 
increase being broad-based. Credit disbursed by Non-Banking Financial Companies 
(NBFCs) has also been on the rise. The balance sheet clean-up exercise has been vital in 
enhancing the lending ability of financial institutions. The Gross Non-Performing Assets 
(GNPA) ratio of SCBs has fallen to a seven-year low of 5.0, while the Capital-to-Risk 
Weighted Assets Ratio (CRAR) remains healthy at 16.0 and well above the regulatory 
requirement of 11.5. The health of NBFCs has continued to improve as well. The recovery 
rate for the SCBs through Insolvency and Bankruptcy Code (IBC) was highest in FY22 
compared to other channels.  
Political and economic developments in 2022 – the breakout of a conflict in Europe, 
high inflation and raising interest rates - meant that capital markets around the world 
were characterised by increased volatility. However, domestic capital markets displayed 
some encouraging trends. The primary equity markets witnessed participation from all 
segments, especially with increased Small and Medium Enterprises (SMEs) contributions 
MONETARY MANAGEMENT 
AND FINANCIAL INTER 
MEDIATION: A GOOD YEAR
79 Monetary Management And Financial Inter Mediation: A Good Year
while primary private debt markets saw a growth in placements and resource mobilisation. 
While secondary capital market indices of the Nifty 50 and the S&P BSE Sensex were 
not immune to the volatility in Foreign Portfolio Investment (FPI) flows, they performed 
better than their peers between April and December 2022. Furthermore, net FPI flows 
turned positive in the quarter ending December 2022. The indices have displayed a 
decreasing trend in volatility as measured by the India Volatility Index (VIX) over this 
period. Both developments underscore India’s strong macroeconomic fundamentals and 
relatively buoyant demand outlook.
The increasing outreach of the banking sector and capital markets is reflected in the 
insurance and pension sectors. Insurance penetration in India has been steadily increasing, 
with life insurance penetration being above the emerging markets and global averages. 
Important government interventions and a conducive regulatory environment have 
supported the growth of the insurance market, which has seen increasing partnerships, 
product innovations, and vibrant distribution channels. India is poised to emerge as one 
of the fastest-growing insurance markets in the coming decade. The pension sector too has 
been taking rapid strides since the introduction of the National Pension Scheme (NPS), 
more recently, the Atal Pension Yojana (APY). The sector has witnessed a robust increase 
in the number of subscribers and assets under management (AuM). The expansion of 
the sector has been aided by government measures such as relaxation in CCS (Pension) 
Rules, integration of electronic Pension Payment Order (e-PPO) with DigiLocker, and 
relaxation in the timeline for submitting Digital Life Certificate.
As global central banks reaffirm their hawkish stances and telegraph ‘higher-for-longer’ 
policy rates in their battle against inflation, monetary conditions are expected to remain 
tight worldwide. Domestically, however, RBI’s support to growth will ensure adequate 
liquidity in financial markets. The growth in credit offtake is expected to sustain, and 
combined with a pick-up in private Capex, will usher in a virtuous investment cycle. The 
credit upcycle will also be aided by constant monitoring of the risks in the financial system 
by the regulators and their efforts to contain them. Strong macroeconomic fundamentals 
will underpin the return of global capital flows to India once the fog of uncertainty lifts. 
The financial system will play a key role in realising the objectives of Amrit Kaal.
Monetary developments
4.1 Inflationary pressures dominated the global economic landscape in FY23. The build-up of 
price pressures occurring in tandem with the economic recovery in FY22 from the pandemic was 
long viewed as transient. It was expected to abate as supply chains normalised. The debate on 
said transience was put to rest by the conflict that erupted in Europe in February 2022. It resulted 
in commodity prices soaring and added significantly to the prevailing inflationary pressures. 
This development has triggered the current sharp and synchronous monetary tightening cycle.  
Setting the context, this chapter will review India’s monetary developments and the performance 
of the financial system in the current financial year. It includes reviewing the monetary policy 
actions and their impact on system liquidity and evaluating the performance of the banking 
system, sectoral credit developments and various insolvency frameworks. Further, it looks into 
the capital market, insurance and pension sector developments.
80 Economic Survey 2022-23
4.2 The Monetary Policy Committee (MPC) maintained a status quo on the policy repo rate 
between May 2020 and February 2022 after implementing a 115 basis points (bps) reduction 
between March 2020 and May 2020. Retail inflation has crossed the upper limit of RBI’s tolerance 
band since January 2022. Sensing a serious risk to price stability, RBI initiated the monetary 
tightening cycle. In its April 2022 meeting, the committee introduced the Standing Deposit 
Facility (SDF), which allowed for the deposit of excess funds by banks with the RBI without the 
necessity of collateral in the form of government securities, thereby allowing effective liquidity 
management in a collateral-free manner. Here, it is worth mentioning that while the SDF 
window is available for overnight deposits, the Reserve Bank retains the flexibility to absorb 
surplus liquidity of longer tenors under the window, if necessary, with appropriate pricing. The 
SDF, introduced at a rate of 3.75 per cent, replaced the reverse repo rate as the new floor of the 
Liquidity Adjustment Facility (LAF) corridor. The MPC also indicated a change in stance from 
‘Accommodative’ to ‘Accommodative and focused on the withdrawal of accommodation, while 
supporting growth’ in this meeting, signalling the start of the monetary tightening cycle.
Figure IV .1: Policy Rates
2.5
3.5
4.5
5.5
6.5
7.5
Feb-20
Apr-20
Jun-20
Aug-20
Oct-20
Dec-20
Feb-21
Apr-21
Jun-21
Aug-21
Oct-21
Dec-21
Feb-22
Apr-22
Jun-22
Aug-22
Oct-22
Dec-22
Per cent
Fixed Reverse repo rate Repo rate SDF rate MSF rate
Source: RBI
4.3 Recognising the sizeable upside risk imparted by adverse global developments, such as 
the generalised hardening of commodity prices and an increased likelihood of prolonged supply 
chain disruptions, the MPC convened an off-cycle meeting in May 2022. Members unanimously 
voted for an increase of 40 bps each in the policy repo rate, the SDF and the Marginal Standing 
Facility (MSF), and a 50 bps increase in the Cash Reserve Ratio (CRR). Between May 2022 
and December 2022 and over five meetings, the MPC implemented a cumulative hike of 225 
bps each in the policy repo rate, the SDF, the MSF and the bank rate. In the initial phases of 
the tightening cycle, the committee noted that commodity price-driven inflationary pressures, 
increased volatility and initial signs of a slowdown in output characterised the global outlook. 
In its latest meeting of December 5-7 2022, the MPC hiked the policy repo rate by 35 bps, and 
reiterated its focus on withdrawal of accommodation to ensure that inflation remains within the 
target going forward, while supporting growth.  
Page 4


CHAPTER
04
The year 2022 marked the return of high inflation, especially in advanced economies, 
after nearly four decades. Inflation did not spare emerging economies either. These 
developments led to an unprecedented, synchronous, and sharp cycle of monetary 
tightening across countries. Major central banks have implemented sharp increases in 
policy rates, with the Federal Reserve’s rate hikes being the steepest since the 1970s. 
While the Federal Reserve has raised policy rates by 425 basis points (bps), the European 
Central Bank (ECB) and the Bank of England (BoE) have implemented 300 bps and 
250 bps rate increases, respectively. The RBI initiated its monetary tightening cycle in 
April 2022 and has since implemented a policy repo rate hike of 225 bps. Consequently, 
domestic financial conditions began to tighten, which was reflected in the lower growth 
of monetary aggregates.
The change in RBI’s policy stance in FY23 led to a moderation of surplus liquidity 
conditions that prevailed during the pandemic years. Monetary policy transmission is 
well underway as lending and deposit rates increased following the hike in policy rates. In 
the government securities (G-sec) market, bond yields were on an upward trajectory until 
June 2022 on concerns of high inflation and policy rate hikes. These yields moderated 
in November and December 2022, aided by lower crude oil prices, a slower pace of rate 
hikes, and general moderation in global sovereign bond yields. 
While the global tightening cycle has contributed to a dampened global outlook, the 
domestic appetite for credit has been on an upswing. Non-food credit offtake by scheduled 
Commercial Banks (SCBs) has been growing in double digits since April 2022, with the 
increase being broad-based. Credit disbursed by Non-Banking Financial Companies 
(NBFCs) has also been on the rise. The balance sheet clean-up exercise has been vital in 
enhancing the lending ability of financial institutions. The Gross Non-Performing Assets 
(GNPA) ratio of SCBs has fallen to a seven-year low of 5.0, while the Capital-to-Risk 
Weighted Assets Ratio (CRAR) remains healthy at 16.0 and well above the regulatory 
requirement of 11.5. The health of NBFCs has continued to improve as well. The recovery 
rate for the SCBs through Insolvency and Bankruptcy Code (IBC) was highest in FY22 
compared to other channels.  
Political and economic developments in 2022 – the breakout of a conflict in Europe, 
high inflation and raising interest rates - meant that capital markets around the world 
were characterised by increased volatility. However, domestic capital markets displayed 
some encouraging trends. The primary equity markets witnessed participation from all 
segments, especially with increased Small and Medium Enterprises (SMEs) contributions 
MONETARY MANAGEMENT 
AND FINANCIAL INTER 
MEDIATION: A GOOD YEAR
79 Monetary Management And Financial Inter Mediation: A Good Year
while primary private debt markets saw a growth in placements and resource mobilisation. 
While secondary capital market indices of the Nifty 50 and the S&P BSE Sensex were 
not immune to the volatility in Foreign Portfolio Investment (FPI) flows, they performed 
better than their peers between April and December 2022. Furthermore, net FPI flows 
turned positive in the quarter ending December 2022. The indices have displayed a 
decreasing trend in volatility as measured by the India Volatility Index (VIX) over this 
period. Both developments underscore India’s strong macroeconomic fundamentals and 
relatively buoyant demand outlook.
The increasing outreach of the banking sector and capital markets is reflected in the 
insurance and pension sectors. Insurance penetration in India has been steadily increasing, 
with life insurance penetration being above the emerging markets and global averages. 
Important government interventions and a conducive regulatory environment have 
supported the growth of the insurance market, which has seen increasing partnerships, 
product innovations, and vibrant distribution channels. India is poised to emerge as one 
of the fastest-growing insurance markets in the coming decade. The pension sector too has 
been taking rapid strides since the introduction of the National Pension Scheme (NPS), 
more recently, the Atal Pension Yojana (APY). The sector has witnessed a robust increase 
in the number of subscribers and assets under management (AuM). The expansion of 
the sector has been aided by government measures such as relaxation in CCS (Pension) 
Rules, integration of electronic Pension Payment Order (e-PPO) with DigiLocker, and 
relaxation in the timeline for submitting Digital Life Certificate.
As global central banks reaffirm their hawkish stances and telegraph ‘higher-for-longer’ 
policy rates in their battle against inflation, monetary conditions are expected to remain 
tight worldwide. Domestically, however, RBI’s support to growth will ensure adequate 
liquidity in financial markets. The growth in credit offtake is expected to sustain, and 
combined with a pick-up in private Capex, will usher in a virtuous investment cycle. The 
credit upcycle will also be aided by constant monitoring of the risks in the financial system 
by the regulators and their efforts to contain them. Strong macroeconomic fundamentals 
will underpin the return of global capital flows to India once the fog of uncertainty lifts. 
The financial system will play a key role in realising the objectives of Amrit Kaal.
Monetary developments
4.1 Inflationary pressures dominated the global economic landscape in FY23. The build-up of 
price pressures occurring in tandem with the economic recovery in FY22 from the pandemic was 
long viewed as transient. It was expected to abate as supply chains normalised. The debate on 
said transience was put to rest by the conflict that erupted in Europe in February 2022. It resulted 
in commodity prices soaring and added significantly to the prevailing inflationary pressures. 
This development has triggered the current sharp and synchronous monetary tightening cycle.  
Setting the context, this chapter will review India’s monetary developments and the performance 
of the financial system in the current financial year. It includes reviewing the monetary policy 
actions and their impact on system liquidity and evaluating the performance of the banking 
system, sectoral credit developments and various insolvency frameworks. Further, it looks into 
the capital market, insurance and pension sector developments.
80 Economic Survey 2022-23
4.2 The Monetary Policy Committee (MPC) maintained a status quo on the policy repo rate 
between May 2020 and February 2022 after implementing a 115 basis points (bps) reduction 
between March 2020 and May 2020. Retail inflation has crossed the upper limit of RBI’s tolerance 
band since January 2022. Sensing a serious risk to price stability, RBI initiated the monetary 
tightening cycle. In its April 2022 meeting, the committee introduced the Standing Deposit 
Facility (SDF), which allowed for the deposit of excess funds by banks with the RBI without the 
necessity of collateral in the form of government securities, thereby allowing effective liquidity 
management in a collateral-free manner. Here, it is worth mentioning that while the SDF 
window is available for overnight deposits, the Reserve Bank retains the flexibility to absorb 
surplus liquidity of longer tenors under the window, if necessary, with appropriate pricing. The 
SDF, introduced at a rate of 3.75 per cent, replaced the reverse repo rate as the new floor of the 
Liquidity Adjustment Facility (LAF) corridor. The MPC also indicated a change in stance from 
‘Accommodative’ to ‘Accommodative and focused on the withdrawal of accommodation, while 
supporting growth’ in this meeting, signalling the start of the monetary tightening cycle.
Figure IV .1: Policy Rates
2.5
3.5
4.5
5.5
6.5
7.5
Feb-20
Apr-20
Jun-20
Aug-20
Oct-20
Dec-20
Feb-21
Apr-21
Jun-21
Aug-21
Oct-21
Dec-21
Feb-22
Apr-22
Jun-22
Aug-22
Oct-22
Dec-22
Per cent
Fixed Reverse repo rate Repo rate SDF rate MSF rate
Source: RBI
4.3 Recognising the sizeable upside risk imparted by adverse global developments, such as 
the generalised hardening of commodity prices and an increased likelihood of prolonged supply 
chain disruptions, the MPC convened an off-cycle meeting in May 2022. Members unanimously 
voted for an increase of 40 bps each in the policy repo rate, the SDF and the Marginal Standing 
Facility (MSF), and a 50 bps increase in the Cash Reserve Ratio (CRR). Between May 2022 
and December 2022 and over five meetings, the MPC implemented a cumulative hike of 225 
bps each in the policy repo rate, the SDF, the MSF and the bank rate. In the initial phases of 
the tightening cycle, the committee noted that commodity price-driven inflationary pressures, 
increased volatility and initial signs of a slowdown in output characterised the global outlook. 
In its latest meeting of December 5-7 2022, the MPC hiked the policy repo rate by 35 bps, and 
reiterated its focus on withdrawal of accommodation to ensure that inflation remains within the 
target going forward, while supporting growth.  
81 Monetary Management And Financial Inter Mediation: A Good Year
4.4 Reserve money (M0) increased by 10.3 per cent year-on-year (YoY) as on 30th  December 
2022 compared to 13 per cent last year. However, reserve money adjusted for the first-round 
impact of changes in the Cash Reserve Ratio (CRR) recorded a YoY growth of 7.8 per cent 
compared to 9.1 per cent a year ago. On the component side, growth in Currency in Circulation 
(CIC) broadly remained stable at levels seen after Covid-19, barring a marginal increase in the 
immediate aftermath of the outbreak of the Russia-Ukraine conflict, which can be attributed to 
a rise in precautionary holdings. So far, expansion in M0 during FY23 was mainly driven by 
bankers’ deposits with the RBI, with an increase in the CRR.
Table IV .1: YoY Growth in monetary aggregates (in per cent)
Item FY17^ FY18 FY19 FY20 FY21 FY22 FY23*
1. Reserve Money (M0) -12.9 27.3 14.5 9.4 18.8 13.0 10.3
1.a.      Currency in 
Circulation (CiC)
-19.7 37.0 16.8 14.5 16.6 9.8 8.2
1.b.  Bankers’ Deposits 
with the RBI
8.4 3.9 6.4 -9.6 28.5 25.4 17.6
2. Narrow Money (M1) -3.9 21.8 13.6 11.2 16.2 10.7 7.6
3. Broad Money (M3) 6.9 9.2 10.5 8.9 12.2 8.8 8.7
3.a.  Currency with the  
    Public
-20.8 39.2 16.6 14.5 17.1 10.3 8.4
3.b.   Aggregate Deposits 6.9 5.8 9.6 8.0 11.3 8.4 9.2
        Demand Deposits 18.4 6.2 9.6 6.8 14.8 10.9 6.2
        Time Deposits 10.2 5.8 9.6 8.1 10.9 8.1 9.1
Source: RBI.
Note: ^: March 31, 2017 over April 1, 2016, barring M0, CiC and Bankers' Deposits with the RBI.      
    *: Data for FY23 is as on December 30, 2022
Monetary developments reflect the tightening financial conditions
Figure IV .2a: Declining YoY 
growth of broad money
Figure IV .2b: Converging Money 
Multiplier (MM) measures
5
7
9
11
13
15
17
Apr-21
Jun-21
Aug-21
Oct-21
Dec-21
Feb-22
Apr-22
Jun-22
Aug-22
Oct-22
Dec-22
Per cent
M3
Aggregate Deposits
Curr ency with Public
4.0
4.4
4.8
5.2
5.6
Mar-21
Jun-21
Sep-21
Dec-21
Mar-22
Jun-22
Sep-22
Dec-22
R atio
MM
MM adjusted for Reverse Repo
Source: RBI
Page 5


CHAPTER
04
The year 2022 marked the return of high inflation, especially in advanced economies, 
after nearly four decades. Inflation did not spare emerging economies either. These 
developments led to an unprecedented, synchronous, and sharp cycle of monetary 
tightening across countries. Major central banks have implemented sharp increases in 
policy rates, with the Federal Reserve’s rate hikes being the steepest since the 1970s. 
While the Federal Reserve has raised policy rates by 425 basis points (bps), the European 
Central Bank (ECB) and the Bank of England (BoE) have implemented 300 bps and 
250 bps rate increases, respectively. The RBI initiated its monetary tightening cycle in 
April 2022 and has since implemented a policy repo rate hike of 225 bps. Consequently, 
domestic financial conditions began to tighten, which was reflected in the lower growth 
of monetary aggregates.
The change in RBI’s policy stance in FY23 led to a moderation of surplus liquidity 
conditions that prevailed during the pandemic years. Monetary policy transmission is 
well underway as lending and deposit rates increased following the hike in policy rates. In 
the government securities (G-sec) market, bond yields were on an upward trajectory until 
June 2022 on concerns of high inflation and policy rate hikes. These yields moderated 
in November and December 2022, aided by lower crude oil prices, a slower pace of rate 
hikes, and general moderation in global sovereign bond yields. 
While the global tightening cycle has contributed to a dampened global outlook, the 
domestic appetite for credit has been on an upswing. Non-food credit offtake by scheduled 
Commercial Banks (SCBs) has been growing in double digits since April 2022, with the 
increase being broad-based. Credit disbursed by Non-Banking Financial Companies 
(NBFCs) has also been on the rise. The balance sheet clean-up exercise has been vital in 
enhancing the lending ability of financial institutions. The Gross Non-Performing Assets 
(GNPA) ratio of SCBs has fallen to a seven-year low of 5.0, while the Capital-to-Risk 
Weighted Assets Ratio (CRAR) remains healthy at 16.0 and well above the regulatory 
requirement of 11.5. The health of NBFCs has continued to improve as well. The recovery 
rate for the SCBs through Insolvency and Bankruptcy Code (IBC) was highest in FY22 
compared to other channels.  
Political and economic developments in 2022 – the breakout of a conflict in Europe, 
high inflation and raising interest rates - meant that capital markets around the world 
were characterised by increased volatility. However, domestic capital markets displayed 
some encouraging trends. The primary equity markets witnessed participation from all 
segments, especially with increased Small and Medium Enterprises (SMEs) contributions 
MONETARY MANAGEMENT 
AND FINANCIAL INTER 
MEDIATION: A GOOD YEAR
79 Monetary Management And Financial Inter Mediation: A Good Year
while primary private debt markets saw a growth in placements and resource mobilisation. 
While secondary capital market indices of the Nifty 50 and the S&P BSE Sensex were 
not immune to the volatility in Foreign Portfolio Investment (FPI) flows, they performed 
better than their peers between April and December 2022. Furthermore, net FPI flows 
turned positive in the quarter ending December 2022. The indices have displayed a 
decreasing trend in volatility as measured by the India Volatility Index (VIX) over this 
period. Both developments underscore India’s strong macroeconomic fundamentals and 
relatively buoyant demand outlook.
The increasing outreach of the banking sector and capital markets is reflected in the 
insurance and pension sectors. Insurance penetration in India has been steadily increasing, 
with life insurance penetration being above the emerging markets and global averages. 
Important government interventions and a conducive regulatory environment have 
supported the growth of the insurance market, which has seen increasing partnerships, 
product innovations, and vibrant distribution channels. India is poised to emerge as one 
of the fastest-growing insurance markets in the coming decade. The pension sector too has 
been taking rapid strides since the introduction of the National Pension Scheme (NPS), 
more recently, the Atal Pension Yojana (APY). The sector has witnessed a robust increase 
in the number of subscribers and assets under management (AuM). The expansion of 
the sector has been aided by government measures such as relaxation in CCS (Pension) 
Rules, integration of electronic Pension Payment Order (e-PPO) with DigiLocker, and 
relaxation in the timeline for submitting Digital Life Certificate.
As global central banks reaffirm their hawkish stances and telegraph ‘higher-for-longer’ 
policy rates in their battle against inflation, monetary conditions are expected to remain 
tight worldwide. Domestically, however, RBI’s support to growth will ensure adequate 
liquidity in financial markets. The growth in credit offtake is expected to sustain, and 
combined with a pick-up in private Capex, will usher in a virtuous investment cycle. The 
credit upcycle will also be aided by constant monitoring of the risks in the financial system 
by the regulators and their efforts to contain them. Strong macroeconomic fundamentals 
will underpin the return of global capital flows to India once the fog of uncertainty lifts. 
The financial system will play a key role in realising the objectives of Amrit Kaal.
Monetary developments
4.1 Inflationary pressures dominated the global economic landscape in FY23. The build-up of 
price pressures occurring in tandem with the economic recovery in FY22 from the pandemic was 
long viewed as transient. It was expected to abate as supply chains normalised. The debate on 
said transience was put to rest by the conflict that erupted in Europe in February 2022. It resulted 
in commodity prices soaring and added significantly to the prevailing inflationary pressures. 
This development has triggered the current sharp and synchronous monetary tightening cycle.  
Setting the context, this chapter will review India’s monetary developments and the performance 
of the financial system in the current financial year. It includes reviewing the monetary policy 
actions and their impact on system liquidity and evaluating the performance of the banking 
system, sectoral credit developments and various insolvency frameworks. Further, it looks into 
the capital market, insurance and pension sector developments.
80 Economic Survey 2022-23
4.2 The Monetary Policy Committee (MPC) maintained a status quo on the policy repo rate 
between May 2020 and February 2022 after implementing a 115 basis points (bps) reduction 
between March 2020 and May 2020. Retail inflation has crossed the upper limit of RBI’s tolerance 
band since January 2022. Sensing a serious risk to price stability, RBI initiated the monetary 
tightening cycle. In its April 2022 meeting, the committee introduced the Standing Deposit 
Facility (SDF), which allowed for the deposit of excess funds by banks with the RBI without the 
necessity of collateral in the form of government securities, thereby allowing effective liquidity 
management in a collateral-free manner. Here, it is worth mentioning that while the SDF 
window is available for overnight deposits, the Reserve Bank retains the flexibility to absorb 
surplus liquidity of longer tenors under the window, if necessary, with appropriate pricing. The 
SDF, introduced at a rate of 3.75 per cent, replaced the reverse repo rate as the new floor of the 
Liquidity Adjustment Facility (LAF) corridor. The MPC also indicated a change in stance from 
‘Accommodative’ to ‘Accommodative and focused on the withdrawal of accommodation, while 
supporting growth’ in this meeting, signalling the start of the monetary tightening cycle.
Figure IV .1: Policy Rates
2.5
3.5
4.5
5.5
6.5
7.5
Feb-20
Apr-20
Jun-20
Aug-20
Oct-20
Dec-20
Feb-21
Apr-21
Jun-21
Aug-21
Oct-21
Dec-21
Feb-22
Apr-22
Jun-22
Aug-22
Oct-22
Dec-22
Per cent
Fixed Reverse repo rate Repo rate SDF rate MSF rate
Source: RBI
4.3 Recognising the sizeable upside risk imparted by adverse global developments, such as 
the generalised hardening of commodity prices and an increased likelihood of prolonged supply 
chain disruptions, the MPC convened an off-cycle meeting in May 2022. Members unanimously 
voted for an increase of 40 bps each in the policy repo rate, the SDF and the Marginal Standing 
Facility (MSF), and a 50 bps increase in the Cash Reserve Ratio (CRR). Between May 2022 
and December 2022 and over five meetings, the MPC implemented a cumulative hike of 225 
bps each in the policy repo rate, the SDF, the MSF and the bank rate. In the initial phases of 
the tightening cycle, the committee noted that commodity price-driven inflationary pressures, 
increased volatility and initial signs of a slowdown in output characterised the global outlook. 
In its latest meeting of December 5-7 2022, the MPC hiked the policy repo rate by 35 bps, and 
reiterated its focus on withdrawal of accommodation to ensure that inflation remains within the 
target going forward, while supporting growth.  
81 Monetary Management And Financial Inter Mediation: A Good Year
4.4 Reserve money (M0) increased by 10.3 per cent year-on-year (YoY) as on 30th  December 
2022 compared to 13 per cent last year. However, reserve money adjusted for the first-round 
impact of changes in the Cash Reserve Ratio (CRR) recorded a YoY growth of 7.8 per cent 
compared to 9.1 per cent a year ago. On the component side, growth in Currency in Circulation 
(CIC) broadly remained stable at levels seen after Covid-19, barring a marginal increase in the 
immediate aftermath of the outbreak of the Russia-Ukraine conflict, which can be attributed to 
a rise in precautionary holdings. So far, expansion in M0 during FY23 was mainly driven by 
bankers’ deposits with the RBI, with an increase in the CRR.
Table IV .1: YoY Growth in monetary aggregates (in per cent)
Item FY17^ FY18 FY19 FY20 FY21 FY22 FY23*
1. Reserve Money (M0) -12.9 27.3 14.5 9.4 18.8 13.0 10.3
1.a.      Currency in 
Circulation (CiC)
-19.7 37.0 16.8 14.5 16.6 9.8 8.2
1.b.  Bankers’ Deposits 
with the RBI
8.4 3.9 6.4 -9.6 28.5 25.4 17.6
2. Narrow Money (M1) -3.9 21.8 13.6 11.2 16.2 10.7 7.6
3. Broad Money (M3) 6.9 9.2 10.5 8.9 12.2 8.8 8.7
3.a.  Currency with the  
    Public
-20.8 39.2 16.6 14.5 17.1 10.3 8.4
3.b.   Aggregate Deposits 6.9 5.8 9.6 8.0 11.3 8.4 9.2
        Demand Deposits 18.4 6.2 9.6 6.8 14.8 10.9 6.2
        Time Deposits 10.2 5.8 9.6 8.1 10.9 8.1 9.1
Source: RBI.
Note: ^: March 31, 2017 over April 1, 2016, barring M0, CiC and Bankers' Deposits with the RBI.      
    *: Data for FY23 is as on December 30, 2022
Monetary developments reflect the tightening financial conditions
Figure IV .2a: Declining YoY 
growth of broad money
Figure IV .2b: Converging Money 
Multiplier (MM) measures
5
7
9
11
13
15
17
Apr-21
Jun-21
Aug-21
Oct-21
Dec-21
Feb-22
Apr-22
Jun-22
Aug-22
Oct-22
Dec-22
Per cent
M3
Aggregate Deposits
Curr ency with Public
4.0
4.4
4.8
5.2
5.6
Mar-21
Jun-21
Sep-21
Dec-21
Mar-22
Jun-22
Sep-22
Dec-22
R atio
MM
MM adjusted for Reverse Repo
Source: RBI
82 Economic Survey 2022-23
4.5 As on 30th December 2022, broad money stock (M3) increased by 8.7 per cent YoY . From 
the component side, aggregate deposits have been the largest component and contributed most 
to the expansion of M3 during the year so far. Amongst sources, bank credit to the commercial 
sector drove the expansion of broad money, and net bank credit to the government supplemented 
this expansion. Of significance is the increase in the share of bank credit to the commercial 
sector in M3 to 64.3 per cent as on 30th December 2022 from 61.1 per cent in the corresponding 
period of the previous year, reflecting the upswing in the credit disbursal by commercial 
banks.
4.6 The money multiplier – the ratio of M3 and M0 – has broadly remained stable at an 
average of 5.1 over April – December 2022 period compared to 5.2 in the corresponding period 
of the previous year. However, M0 adjusted for reverse repo, which is analytically akin to banks’ 
deposits with the RBI, was much higher until April 2022. Hence, the adjusted money multiplier 
was lower at 4.3 at the beginning of FY23. M0 adjusted for the reverse repo is now much closer 
to M0; hence, as on 30 December 2022, the money multiplier and adjusted money multiplier 
stood at 5.21 and 5.03, respectively. 
Liquidity Conditions
4.7 Surplus liquidity conditions that prevailed post-Covid-19 in response to the Reserve Bank’s 
conventional and unconventional monetary measures moderated during FY23 in consonance 
with the changed monetary policy stance that focused on the withdrawal of accommodation. 
With the MSF rate retained at 25 bps above the policy repo rate, the LAF corridor became 
symmetric around the policy repo rate - the corridor width was thus restored to 50 bps, the 
position that prevailed before the pandemic. The RBI’s move to hike the CRR by 50 bps resulted 
in a withdrawal of primary liquidity to the tune of ?87,000 crore from the banking system.
Liquidity conditions moderating
Figure IV .3a: Gradual withdrawal of  
surplus liquidity
Figure IV .3b: Overnight call money rates 
now trending well inside LAF corridor
-1
1
3
5
7
01- A pr - 22
22- A pr - 22
13- M a y- 22
03- J un- 22
24- J un- 22
15- J ul - 22
05- A ug- 22
26- A ug- 22
16- S e p- 22
07- O c t - 22
28- O c t - 22
18- N ov- 22
09- D e c - 22
30- D e c - 22
? lakh crore
Net LAF
Daily SDF
Variable Rate Reverse Repo
MSF
3
4
5
6
7
01- A pr - 22
22- A pr - 22
13- M a y- 22
03- J un- 22
24- J un- 22
15- J ul - 22
05- A ug- 22
26- A ug- 22
16- S e p- 22
07- O c t - 22
28- O c t - 22
18- N ov- 22
09- D e c - 22
30- D e c - 22
Per cent
Weighted average call rate
Fixed Reverse repo rate
Repo rate
 SDF rate
MSF rate
Source: RBI