RBI keeps policy rates unchanged
- The Monetary Policy Committee (MPC) is a committee of the RBI which is entrusted with the task of fixing the benchmark policy interest rate (repo rate) to contain inflation within the specified target level.
- The 2016 amendment of the Reserve Bank of India Act, 1934 provides for a statutory and institutionalised framework for the MPC.
- The MPC has six members
- RBI Governor (Chairperson), RBI Deputy Governor in charge of monetary policy, one official nominated by the RBI Board and remaining 3 members would represent the Government.
- The MPC makes decisions based on majority vote. In case of a tie, the RBI governor will have a second or casting vote.
Why in News?
- The Monetary Policy Committee of the RBI has voted unanimously to leave the policy repo rate unchanged at 4%.
- The MPC also decided to continue with the accommodative stance as long as necessary to sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy.
- The marginal standing facility (MSF) rate remains unchanged at 4.25% and the reverse repo rate stands unchanged at 3.35%.
Projection of GDP growth
- Taking various factors into consideration, the projection of real GDP growth for 2021-22 has been retained at 10.5% consisting of 26.2% in Q1; 8.3% in Q2; 5.4% in Q3; and 6.2% in Q4.
Repo Rate & Reverse Repo Rate
- Repo rate is the rate of interest which is applied by RBI to commercial banks when the latter borrows from RBI. Reverse Repo rate is the rate at which RBI borrows money from commercial banks by lending securities.
- Both the Repo rate and Reverse Repo rate are used to control inflation and money supply in the economy.
- In the event of rising inflation, the RBI increases the repo rate which will act as a disincentive for banks to borrow from the central bank.
- This ultimately reduces the money supply in the economy and thus helps in arresting inflation. Similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.
- Marginal Standing Facility (MSF) is an overnight liquidity support provided by RBI to commercial banks with a higher interest rate over the repo rate.
- MSF can be used by a bank after it exhausts its eligible security holdings for borrowing under other options. Under MSF, banks can borrow funds from the RBI by pledging government securities within the limits of the Statutory Liquidity Ratio (SLR).
- MSF, being a penal rate, is always fixed above the repo rate.
- The scheme was introduced by RBI with the main aim of reducing volatility in the overnight lending rates in the inter-bank market and to enable smooth monetary transmission in the financial system.
- In March 2020, the RBI increased the cap for liquidity available under the marginal standing facility, from 2 per cent to 3 per cent of their Net Demand and Time Liabilities (NDTL) — or deposits.
Monetary policy stance
- The Central Banks use different terms to indicate its monetary policy stance on deciding policy rates like repo rate.
- “Accommodative” indicates that the central bank is telling the market to expect a rate cut anytime, “neutral” means that RBI could either increase or reduce repo rates as per liquidity conditions, “calibrated tightening” means that a cut in the repo rate is unlikely in the current rate cycle.
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