News Highlights
The RBI rises Repo Rate by 50 basis points . The RBI rises repo rate second time over a month
Key Features
- The RBI has now raised the Repo rate by 90 basis points to 4.90 per cent in a matter of five weeks, with the hikes set to raise the lending rates in the banking system and impact the demand in the economy.
- Reason for Raising the Repo Rate
- Geo-political uncertainties over the grinding war in Ukraine, continuing supply-chain disruptions, and rising energy and food prices.
- Consumer prices accelerated to an eight-year high of nearly 7.8% in April, according to official data.
- According to Monetary Policy Committee inflation is likely to remain above its upper tolerance band of 6 per cent through the first three quarters of FY23 (April-December 2022)
- Expected Impact by increasing the Rate
- The rate hike will force banks and non-banking finance companies to increase lending rates
- Higher lending rate result in higher equated monthly instalments (EMIs) of existing borrowers.
- Deposit rates, mainly fixed term rates, are also set to rise.
- Consumption and demand can be impacted by the Repo rate hike.
Repo Rate
- The repo rate refers to the rate at which commercial banks borrow money by selling their securities to the Reserve Bank
- Objectives of Repo Rate
- At the time of Inflation
- The Repo Rate is used to control inflation.
- The RBI makes concerted efforts to reduce the flow of money in the economy during periods of high inflation.
- Increasing the repo rate is one way to accomplish this.
- As a result, borrowing becomes more expensive for businesses and industries, slowing market investment and money supply.
- As a result, it has a negative impact on economic growth, which helps to keep inflation under control.
- At the time of Inflation
- At the time of Economic Slowdown
- Here the RBI needs to inject funds into the system, on the other hand, it lowers the rate.
- As a result, borrowing money for various investment purposes becomes less expensive for businesses and industries.
- It also expands the economy’s overall money supply. This, in turn, boosts the economy’s growth rate.
Monetary Policy committee
- 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 to restrain inflation within the particular target level.
- It is set up based on the recommendation of the Urjit Patel Committee.
- 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.
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Content Source – Indian Express