Policy Rates 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.

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RBI keeps repo rate unchanged in first monetary policy review of 2017-18

The Reserve Bank of India (RBI) in its first bimonthly monetary policy review of the financial year 2017-18, has kept the key policy rate, the repo rate unchanged, but raised reverse repo rate by 25 bps to 6%, from 5.75%.

Decision in this regard was taken by monetary policy committee (MPC) —which decides interest rates and all six members of the MPC voted in favour of the decision.

Policy Rates

  • Repo rate: It is the rate at which RBI lends to its clients generally against government securities. It was unchanged at 25%.
  • This was the third successive quarterly review in which the RBI has kept its repo rate unchanged at 6.25%.
  • Reverse Repo Rate: It is the rate at which banks lend funds to the RBI. It was raised the Reverse Repo (RR) rate by 25 bps to 6%.
  • 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 was cut to 5%.
  • Bank Rate: It is rate charged by the central bank for lending funds to commercial banks. It was set to 5%.
  • 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 20.50%. 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.
Key Facts
  • The policy decision taken by RBI was consistent with its neutral policy stance with the objective of achieving the medium-term target for retail inflation i.e. 4%.
  • The RBI held that the future course of monetary policy would largely depend on incoming data on how macroeconomic conditions are evolving.
  • It has set its inflation projection to an average of 4.5% in the first half of 2017-18 and 5% in the second half. It has kept GVA growth projection unchanged at 7.4% for FY18 as compared with 6.7% in FY17.
  • The central bank also allowed banks to invest in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) in a bid to spur investments in core infrastructure sectors.

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