Repo Rate Rises

The Reserve Bank of India (RBI),raised the repo rate by 40 basis points (bps) to 4.4% citing inflation that was globally “rising alarmingly and spreading fast”.
The repo rate increase was the first since August 2018
Reasons for raising repo rate
- Impact of Ukraine war on global economy
- sanctions and retaliatory actions intensify,
- shortages,
- volatility in commodity and financial markets,
- supply dislocations and, most alarmingly,
- persistent and spreading inflationary pressures are becoming more acute

As part of the increases, the standing deposit facility (SDF) rate would become 4.15% and the marginal standing facility (MSF) and bank rate would be 4.65%.
“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%,” the MPC noted.

The Monetary Policy Committee (MPC) is a statutory body constituted by the Central Government headed by the Governor of RBI.
The Monetary Policy Committee was formed with the mission of fixing the benchmark policy interest rate (repo rate) to restrain inflation within the particular target level.
It is set up based on the recommendation of the Urjit Patel Committee.
Instruments of Monetary Policy
- There are both direct and indirect instruments used for implementing monetary policy. Few include:Repo rate
  - Reverse Repo rate
  - Liquidity Adjustment Facility (LAF)
  - Marginal Standing Facility (MSF)
  - Corridor
  - Bank Rate
  - Cash Reserve Ratio (CRR)
  - Statutory Liquidity Ratio (SLR)
  - Open Market Operations (OMOs)
  - Market Stabilisation Scheme (MSS)
Composition of MPC
- The committee will have six members. Of the six members, the government will nominate three. No government official will be nominated to the MPC.
- The other three members would be from the RBI with the governor being the ex-officio chairperson. Deputy Governor of RBI in charge of the monetary policy will be a member, as also an executive director of the central bank.

Repurchase agreements are a form of short-term borrowing used in the money markets, which involve the purchase of securities with the agreement to sell them back at a specific date, usually for a higher price.
It simply means the rate at which RBI lends money to commercial banks against the pledge of government securities whenever the banks are in need of funds to meet their day-to-day obligations.

An additional tool for absorbing liquidity without any collateral.
The SDF is also a financial stability tool in addition to its role in liquidity management
The SDF will replace the fixed-rate reverse repo (FRRR) as the floor of the liquidity adjustment facility corridor.
Both the standing facilities — the MSF (marginal standing facility) and the SDF will be available on all days of the week, throughout the year.

Marginal Standing Facility (MSF) refers to the rate at which banks can borrow overnight funds from the RBI in exchange for authorised government securities.
The banks have to exchange the securities with the RBI to avail of the overnight credit through MSF.
The maximum credit a bank can avail through MSF is 3% of its total deposits
The banks can use the securities under the SLR quota without paying a penalty as it is an emergency situation.

Content Source – The Hindu