Repo Rate

  • IASbaba
  • June 10, 2022
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In News: In its bi-monthly review the Reserve Bank of India hiked the repo rate by another 50 basis points.

  • Also RBI removed the word “accommodative” from the policy stance

Why has RBI hiked the repo rate?

  • The 50-basis-point hike, which follows a 40-basis-point hike in May has been done with a view to taming inflation
  • The RBI aims to bring inflation down to its targeted 4% (±2%).
  • The two hikes in repo rates over the last five weeks, totalling 90 bps, takes the rate to 4.9%.

How will it impact borrowers and depositors?

  • Banks and housing finance companies, which have already raised their lending rates between 40 bps and 50 bps points following the 40 bps hike in repo rate in May, are now expected to raise the rates again.
  • Both borrowers and depositors are expected to see a hike in lending rates and offering on deposit rates, respectively

What will be the impact of withdrawing the accommodative policy?

  • RBI removed the word “accommodative” from the policy stance.
  • RBI has decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target.
  • The RBI had pumped huge liquidity into the system in 2020 to counter the impact of the pandemic.
  • While this did support economic recovery, it has also been the main reason for the rise in inflation.
  • Recent RBI’s market operations had led to a decline in liquidity in May.
  • Still, overall system liquidity remains in large surplus, with the average daily absorption under the liquidity adjustment facility (LAF) moderating in consonance with the policy of gradual withdrawal of accommodation.
  • The withdrawal will also put upward pressure on interest rates.

Will consumer spending be impacted?

  • The policy withdrawal and the rate hike are expected to impact consumption and demand in the economy.
  • The impact is likely to be more pronounced in non-discretionary spending by consumers.
  • According to the RBI policy panel, the forecast of a normal monsoon should boost kharif sowing and agricultural output. This will support rural consumption.
  • The rebound in contact-intensive services is expected to sustain urban consumption. RBI’s surveys suggest further improvement in consumer confidence and households’ optimism for the outlook a year ahead.

Monetary Policy Measures

  • Monetary policy refers to the policy of the central Bank with regard to use of monetary instruments under its control to manage money supply and interest rates.
  • In 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework.
  • Under amended RBI Act, 1934, the central government is empowered to constitute a six-member Monetary Policy Committee (MPC).
  • Composition: the MPC shall consist of 6 members:
  • RBI Governor as its ex officio chairperson,
  • Deputy Governor in charge of monetary policy,
  • An officer of the Bank to be nominated by the Central Board,
  • Three persons to be appointed by the central government
Tools Features
Cash Reserve Ratio (CRR) The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time.
Statutory Liquidity Ratio (SLR) The share of NDTL that a bank is required to maintain in safe and liquid assets, such as, government securities, cash and gold.
Repo Rate The interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF).
Reverse Repo Rate The interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.
Marginal Standing facility (MSF) It is the rate at which Banks can borrow short term funds from RBI. Under MSF, banks can borrow funds from the RBI by pledging government securities within the limits of the SLR.
Open Market Operations (OMOs) These include both, outright purchase and sale of government securities, for injection and absorption of durable liquidity, respectively.
Market Stabilisation Scheme (MSS)  It is a monetary policy intervention by the RBI to withdraw excess liquidity (or money supply) by selling government securities in the economy, the mobilised cash is held in a separate government account with the Reserve Bank.

Source: Indian Express

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