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Repo Rate Remain Unchanged
Context:
RBI keeps repo rate unchanged at 6.5%; raises FY25 GDP growth forecast to 7.2%.
More on News:
- The Repo Rate rose sharply between May 2022 and February 2023 but it has stayed stagnant at the 6.5% level.
- FY25 GDP growth forecast raised to 7.2%.
- The quarterly projections are – Q1 at 7.3%; Q2 at 7.2%; Q3 at 7.3% and Q4 at 7.2%.
Why RBI is not cutting repo rate?
- Despite keeping the repo rate consistently high, the retail inflation has not dropped to touch the 4% mark since January 2021.
- RBI does not cut the repo rate as soon as the overall inflation rate falls to (or below) the 4% target in any one month.
- The RBI has to be convinced that the inflation rate will stay around the 4% mark sustainably.
- RBI cuts the repo rate when it finds that economic activity needs a boost.
- Presently, India’s gross domestic product (GDP) growth rate has been surprisingly strong over the past year in particular.
Impact of Unchanged Repo Rate:
- No Immediate Impact on Loan EMIs: With the repo rate remaining unchanged, there will be no immediate impact on loan EMIs.
- Stable Interest Rates for New Loans: People looking to take a home or car loan can still do so at similar interest rates.
- No Impact on Borrowing Costs: The unchanged repo rate means that borrowing costs for businesses and consumers will remain the same.
About Monetary Policy:
- It is a macroeconomic policy tool used by the Central Bank to influence the money supply in the economy to achieve certain macroeconomic goals.
- Under the Reserve Bank of India, Act,1934 the goal of RBI’s Monetary Policy:
- To maintain price stability in the economy.
- RBI aims to ensure that prices do not fluctuate beyond a reasonable degree measured by the retail inflation rate – the rate of price rise that is faced by the average individual consumer i.e 4+/- 2%
- To maintain price stability in the economy.
- To promote economic growth when economic activity needs a boost.
- During the COVID-19 pandemic: RBI cuts the repo rate to make it easy for consumers and producers to borrow money and spend.
- Russia-Ukraine war: RBI raises the repo rate to reduce the demand for credit-fuelled consumption and control inflation.
- About the Monetary Policy Committee (MPC):
- The Committee is to meet at least 4 times a year.
- The members of MPC shall hold office for 4 years and shall not be eligible for re-appointment.
- The quorum for a meeting of the MPC is 4 members.
- The RBI Governor will have a casting vote in case of a tie
Monetary Policy Tools:
- Bank Rate: The rate at which the RBI is ready to buy or rediscount Bills of Exchange or other Commercial Papers from the Scheduled Commercial Banks (SCBs).
- Cash Reserve Ratio (CRR): Minimum percentage of a bank’s total Demand and Time Liabilities (DTL) that a Scheduled Commercial Bank is obligated to deposit with the RBI in the form of cash.
- Statutory Liquidity Ratio (SLR): It is the percentage of Net Demand and Time Liabilities (NDTL) that a Scheduled Commercial Bank (SCB) has to keep with itself, in the form of Cash, Gold, or SLR Securities (such as government bonds, treasury bills, and any other instrument notified by the RBI).
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- Liquidity Adjustment Facility (LAF): It allows banks to borrow money from the RBI through repurchase agreements (repos) or to make loans to RBI through reverse repo agreements.
- Repo Rate (Re-purchase Option Rate):
- Repo Rate is the rate of interest at which the RBI provides short-term loans to SCBs against approved securities.
- Repo Rate (Re-purchase Option Rate):
- Liquidity Adjustment Facility (LAF): It allows banks to borrow money from the RBI through repurchase agreements (repos) or to make loans to RBI through reverse repo agreements.
- Reverse Repo Rate:
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- Reverse Repo Rate is the rate of interest at which the RBI borrows funds from the SCBs. In other words, it is the rate at which SCBs park their excess funds with the RBI for a short period.
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- Marginal Standing Facility (MSF): It is an overnight liquidity support scheme by the RBI to provide funds (liquidity injection) to commercial banks with a higher interest rate over the repo rate.
- Standing Deposit Facility (SDF): It is a collateral-free liquidity absorption mechanism introduced by the RBI to absorb excess liquidity from the banks by providing an interest payment.