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RBI keeps repo rate unchanged at 4%

Posted on February 8, 2021 by admin1  89

In News- The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) decided to keep the policy repo rate unchanged at 4.0% under the Liquidity adjustment facility (LAF).

  • Consequently, the reverse repo rate remains unchanged at 3.35% and the marginal standing facility (MSF) rate and the Bank Rate at 4.25%.
    • It was decided on the basis of an assessment of the current and evolving macroeconomic situation.

Key Highlights :

  • The Monetary Policy Committee decided to continue with the accommodative stance as long as necessary to revive growth on a durable basis and mitigate the impact of COVID-19 on the economy while ensuring that inflation remains within the target.
  • These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 % within a band of +/- 2 % while supporting growth.
  • It has also projected the real GDP growth at 10.5% in 2021-22  in the range of 26.2 to 8.3% in H1 and 6.0 % in Q3.
  • The sharp correction in food prices has improved the food price outlook, but some pressures persist, and core inflation remains elevated.
  • Pump prices of petrol and diesel have reached historical highs.
  • Growth was recovering, and the outlook had improved significantly with the rollout of the vaccine programme in the country.

What is Monetary Policy?

  • It is the process of regulating the supply of money in an economy by the monetary authority of the country.
  • It is meant to adjust the inflation rates or interest rates to sustain the price stability and to maintain the predictable exchange rates with foreign currencies.
  • The Reserve Bank of India controls the monetary policy in resonance with the central government’s developmental goals.
  • Four major objectives of the Monetary Policy are-
    • To stabilise the business cycle.
    • To provide reasonable price stability.
    • To provide faster economic growth.
    • Exchange Rate Stability.

About Monetary Policy Committee:

  • It is a committee constituted by the Reserve Bank of India and is tasked with framing monetary policy using tools like the repo rate, reverse repo rate, bank rate, Cash Reserve Ratio (CRR).
    • It was established on the recommendation of the Urjit Patel Committee constituted in 2013.
  • The RBI Act, 1934 was amended by Finance Act (India), 2016 to constitute MPC to bring more transparency and accountability in fixing India’s Monetary Policy.
  • It comprises six members – three officials of the RBI and three external members nominated by the Government of India.
    • The Governor of RBI is the chairperson ex officio of the committee.
  • Deputy governor of RBI in charge of the monetary policy will be a member, as also an executive director of the central bank.
  • Members of the MPC will be appointed for a period of four years and shall not be eligible for reappointment.

Key Terms

  • Repo rate-It is the rate at which the RBI lends money to the banking system for short durations.
    • Commercial banks sell government securities and bonds to the Reserve Bank of India with an agreement to repurchase them on a future date at a predetermined price including interest charges.
  •  Reverse Repo rate-
    •  It is a rate at which the commercial banks give a loan to the central authority.
    •  It is a monetary instrument used to maintain supply in the market.
    •  A reverse repo is the opposite of the repo rate.
  • Liquidity Adjustment Facility (LAF)
    • It is a monetary policy tool which allows banks to borrow money through repurchase agreements or repos.
    • LAF is a facility extended by the Reserve Bank of India to the scheduled commercial banks (excluding RRBs) and primary dealers to avail of liquidity in case of requirement or park excess funds with the RBI in case of excess liquidity on an overnight basis against the collateral of Government securities including State Government securities. Basically, LAF enables liquidity management on a day to day basis.
    • This arrangement is effective in managing liquidity pressures and assuring basic stability in the financial markets.
  • Marginal standing facility (MSF)–
    • It is a window for banks to borrow from the Reserve Bank of India in an emergency situation.
    •  The MSF would be the last resort for banks once they exhaust all borrowing options including the liquidity adjustment facility by pledging government securities, where the rates are lower in comparison with the MSF.
    • It is always fixed above the repo rate.

Source: TH

 
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