Monetary Policy Committee Current Affairs

RBI’s Monetary Policy Review: RBI Hikes Repo Rate to 6.25%

On June 6, 2018, the six members Monetary Policy Committee (MPC) of RBI has decided to hike Repo (short term lending rate) to 6.25% from 6.00%. As per the second Bi-monthly Monetary Policy Statement, the current policy rates of RBI would be as follows:

  • Repo Rate: 6.25%
  • Reverse Repo Rate: 6.00%
  • Marginal Standing Facility (MSF) Rate: 6.50%

The recent rise of 25 basis points in key policy rates is for the first time in four and half years since NDA government was formed in May, 2014.

Repo Rate

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. When RBI increases Repo Rate, the banks can borrow less at a lower cost and thus need to lend at higher rates. This contributes to hike of the interest rates in markets. When RBI increases the repo rate, the move is generally called a tight monetary policy stance.

Reverse 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. The banks use the reverse repo facility to deposit their short-term excess funds with the RBI and earn interest on it. RBI can reduce liquidity in the banking system by increasing the rate at which it borrows from banks. Hiking the repo and reverse repo rate ends up reducing the liquidity and pushes up interest rates.

When the RBI increases the Reverse Repo, it means that now the RBI will provide extra interest on the money which it borrows from the banks. An increase in reverse repo rate means that banks earn higher returns by lending to RBI. This indicates a hike in the deposit rates.

Marginal Standing Facility

Marginal Standing Facility is a new Liquidity Adjustment Facility (LAF) window created by Reserve Bank of India in 2011.  MSF is the rate at which the banks are able to borrow overnight funds from RBI against the approved government securities. The rate of interest on MSF is above 100 bps above the Repo Rate.  The banks can borrow up to 1 percent of their net demand and time liabilities (NDTL) from this facility.

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RBI’s first bimonthly policy FY 2018-19: Policy rates unchanged

The Reserve Bank of India (RBI) in its first bimonthly policy review for financial year 2018-19 has decided to maintain status quo in policy rates by keeping repo rate unchanged at 6.0%.  This decision was taken by RBI’s six member Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel.

Key Highlights of 1st Bi-monthly policy

The MPC in its first bimonthly policy review  for FY 19 voted 5-1 in favour of leaving the Repo rate unchanged. It is fourth time in a row RBI has unchanged repo rate, the rate at which RBI lends funds to banks.

Inflation Projection: RBI has remained cautious on continuing inflation risks. The consumer inflation for FY19 was projected to 4.7-5.1% in the first half of FY19 and 4.4% in second half as against forecast of 5.1-5.6% and 4.5-4.6%, respectively, in the last policy review.

RBI has flagged concerns about absence of more clarity on minimum support prices, monsoon outturn, volatility of crude prices and impact of state government-led house rent allowance increases. Further, in case there is any further fiscal slippage from Budget Estimates for 2018-19 it could adversely impact outlook on inflation

Growth Projections: RBI shifted projecting GDP (gross domestic product) as against GVA (gross value added) growth earlier. It sees GDP growth strengthening to 7.4% in FY19 from 6.6% in FY18 with growth at 7.3-7.4% in the first half and 7.3-7.6% in second half with risks evenly balanced. It also suggested that output gap is closing but downside risks on global trade protectionism, market volatility and weak domestic public finances exists.

Policy Rates

Repo rate: It was unchanged at 6%. It is rate at which RBI lends to its clients generally against government securities.

Reverse Repo Rate: It was unchanged at 5.75%. It is rate at which banks lend funds to RBI.

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

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

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

Statutory Liquidity Ratio (SLR): It was unchanged at 19.5%. It is amount that banks have to maintain a stipulated proportion of their net demand and time liabilities (NDTL) in form of liquid assets like cash, gold and unencumbered securities, treasury bills, dated securities etc.

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