Monetary Policy Review Current Affairs

RBI cuts repo rate by 25 bps to 6%

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has reduced short-term lending rate, or repo rate, by 25 basis points to 6%.  It was RBI’s third bimonthly policy review for the financial year 2017-18.

The decision of the MPC was consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term inflation target of 4% within a band of +/- 2%, while supporting growth.

Policy Rates

Repo rate: It is the rate at which RBI lends to its clients generally against government securities. It was reduced by 25 basis points to 6%. The rate cut comes after a slump in food prices in consumer inflation to a record low of 1.54%.

Reverse Repo Rate: It is the rate at which banks lend funds to the RBI. It was reduced by 25 bps to 5.75%.

Marginal Standing Facility (MSF) Rate: It is rate at which the scheduled banks can borrow funds overnight from RBI against government securities. It is a very short term borrowing scheme for scheduled banks. It adjusted to 6.25%.

Bank Rate: It is rate charged by the central bank for lending funds to commercial banks. It was set to 6.25%. It influences lending rates of commercial banks. Higher bank rate will translate to higher lending rates by the banks.

Cash Reserve Ratio (CRR): It is the amount of funds that the banks have to keep with the RBI. It was unchanged at 4%. The RBI uses the CRR to drain out excessive money from the system.

Statutory Liquidity Ratio (SLR): It was unchanged 20%. It is amount that banks have to maintain a stipulated proportion of their net demand and time liabilities (NDTL) in the form of liquid assets like cash, gold and unencumbered securities, treasury bills, dated securities etc.

About Monetary Policy Committee (MPC)

MPC is a committee of the central bank — Reserve Bank of India, headed by its Governor. It was set up by amending the RBI Act to provide for a statutory and institutionalised framework for MPC.

The 6 member MPC is entrusted with the task of fixing the benchmark policy interest rate (repo rate) to contain inflation within the target level.  The majority voice of the committee will be final in deciding the interest rates.

Composition of MPC includes Governor of RBI (ex officio Chairperson), Deputy Governor of RBI, in charge of Monetary Policy (Member), one officer of RBI (Member) and three members appointed by Central Government as members. Each member has one vote and governor has casting vote in case of tie.

Tags:

RBI Keeps the Repo Rate Unchanged

The Reserve Bank of India has kept repo rate unchanged at 6.25% in its second bi-monthly monetary policy review.

Reverse Repo rate has been kept unchanged at 6%.

The RBI has cut the Statutory Liquidity Ratio (SLR) by 50 basis points to 20%.

RBI has projected the headline inflation in the range of 2.0-3.5% in the first half of 2017-18 and 3.5-4.5% in the second half. According to the central bank, the implementation of GST is not expected to have material impact on overall inflation. It has observed that the 7th Pay Commission allowances, geo political, financial risk pose upside risk to inflation.

RBI has reduced the growth projection for the current fiscal to 7.3% from 7.4%.

The monetary policy decision has been taken by the six-member monetary policy committee (MPC).

The RBI has also revised its target for gross value added (GVA) by 10 basis points to 7.3%.

Background

SLR is the portion of bank deposits that have to be invested in government bonds. Components of SLR include cash in hand, gold owned by the bank, balance with RBI, Net balance in current account & Investment in Government securities. SLR has to be maintained at the close of business on every day.

Repo rate, or repurchase rate, is the rate at which RBI lends to banks for short periods. This is done by RBI buying government bonds from banks with an agreement to sell them back at a fixed rate. The objective of Repo is to inject liquidity in the system. If RBI wants to make it more expensive for banks to borrow money, it increases the repo rate. Similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.
Reverse repo rate is the rate of interest at which the RBI borrows funds from other banks in the short term. This is done by RBI selling government bonds / securities to banks with the commitment to buy them back at a future date.
GVA is another measure for economic growth.

Tags:

123