Repo rate raised by 50 basis points

The Reserve Bank of India’s Monetary Policy Committee (MPC) has raised the policy repo rate by 50 basis points (bps) to 5.9% making loans expensive.

The MPC also lowered the growth projection for FY23 from 7.2% to 7%.

Repo stands for “Repurchase Option”.
Repo Rate is the rate the RBI lends to other banks by buying securities with an agreement that the bank will repurchase them on a specific date.
Repo lending is a short-term option to meet commercial banks’ liquidity requirements.
The increased repo rate will discourage banks from borrowing from the RBI and lending to their customers.
This, in turn, will reduce the liquidity and demand in the market.
On the other hand, a decreased repo rate will encourage banks to borrow and lend to customers increasing the liquidity and demand in the market.
Reverse Repo Rate:
- The reverse repo rate is the interest rate the Reserve Bank of India pays commercial banks when they borrow money from them.
- In other words, the reverse repo is the rate commercial banks in India charge to park their excess money with the Reserve Bank of India for a short period.

Borrowers:
- It will result in a hike in lending rates.
- As a result, borrowing will become costlier.
Depositors:
- The depositors will benefit as banks are expected to raise their deposit rates.

It was created in 2016
It was created to bring transparency and accountability to deciding monetary policy.
MPC determines the policy interest rate required to achieve the inflation target.
The committee comprises six members, where Governor RBI acts as an ex-officio chairman.
Three members are from the RBI, and the government selects three.
The inflation target is to be set once every five years.
The government of India sets it in consultation with the Reserve Bank.
Instruments of Monetary Policy: Both direct and indirect tools are used to implement monetary policy. A few include:
- Repo rate
- Reverse Repo rate
- Liquidity Adjustment Facility (LAF)
- Marginal Standing Facility (MSF)
- Bank Rate
- Cash Reserve Ratio (CRR)
- Statutory Liquidity Ratio (SLR)
- Open Market Operations (OMOs)
- Market Stabilisation Scheme (MSS)

Content Source: The Hindu

Created on October 01, 2022 By

Pavithra

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