Published on: June 9, 2022

THE REPO RATE

THE REPO RATE

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Kapellen The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) voted unanimously to increase the repo rate by 50 basis points to 4.90% in a bid to slow inflation that it estimates will average 7.5% in the current April-June quarter.

Highlights of MPC meeting:

  • MPC raises forecast for CPI inflation this fiscal to 6.7%, sticks with GDP growth of 7.2%
  • The MPC also decided to remain focused on the withdrawal of accommodation which had been provided to support the COVID-19 hit economy, to ensure that inflation remains within the target.

What is an accommodative policy stance?

  • An accommodative stance means the central bank is prepared to expand the money supply to boost economic growth. The central bank, during an accommodative policy period, is willing to cut the interest rates.

What is ‘Repo Rate’

  • Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.
  • In banking, repo rate is related to ‘repurchase option’ or ‘repurchase agreement’. When there is a shortage of funds, commercial banks borrow money from the central bank which is repaid according to the repo rate applicable. The central bank provides these short terms loans against securities such as treasury bills or government bonds.
  • This monetary policy is used by the central bank to control inflation or increase the liquidity of banks. The government increases the repo rate when they need to control prices and restrict borrowings.

The Committee

  • Under Section 45ZB of the amended RBI Act, 1934, the central government is empowered to constitute a six-member Monetary Policy Committee (MPC) to determine the policy interest rate required to achieve the inflation target. The first such MPC was constituted on September 29, 2016.
  • Section 45ZB lays down that “the Monetary Policy Committee shall determine the Policy Rate required to achieve the inflation target”, and that “the decision of the Monetary Policy Committee shall be binding on the Bank”.

Members of MPC

  • Section 45ZB says the MPC shall consist of the RBI Governor as its ex officio chairperson, the Deputy Governor in charge of monetary policy, an officer of the Bank to be nominated by the Central Board, and three persons to be appointed by the central government. The last category of appointments must be from “persons of ability, integrity and standing, having knowledge and experience in the field of economics or banking or finance or monetary policy”. (Section 45ZC)