Monetary Policy Review 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 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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