The Reserve Bank of India (RBI) has kept its key policy rates, including repo and reverse repo rates, unchanged in its monetary policy review. The six-member Monetary Policy Committee headed by RBI Governor Shaktikanta Das announced the same during the bi-annual monetary policy review. The meeting was rescheduled to February 8-10 after Maharashtra Government declared February 7 as a public holiday to mourn the death of legendary singer Bharat Ratna Lata Mangeshkar.
THE KEY TAKEAWAYS FROM THE RBI CONFERENCE:
RBI Policy highlights:?RBI retains accommodative stance ?Repo rate remains unchanged at 4%?Reverse Repo Rate remains unchanged 3.35%?Inflation has risen but remains on expected lines?Inflation likely to peak in Q4FY22#RBIPolicy pic.twitter.com/fXF0ITu1JG
— Manish Gulati (@BodhiTreeWealth) February 10, 2022
WHAT IS REPO RATE?
When the economy (i.e the public, the public and private sector banks) faces shortfall of money, the banks borrow money from the Reserve Bank of India (RBI). The rate at which the RBI lends the money to these banks is called the Repo Rate. It is also a fantastic tool to control inflation as higher rates levied by the RBI causes the banks to reduce lending from the RBI and controls the flow of money in the economy.
As money flow in the country is reduced, people spend less, and it eventually causes sellers to reduce prices, thus helping in reducing the inflation.
On the other hand, the repo rate is decreased when there is a need to infuse more money into the market and support economic growth.
A change in repo rate affects public borrowings such as home loan rates and EMIs. From interest charged by commercial banks on loans to the returns from deposits, various financial and investment instruments are indirectly dependent on the repo rate.
As the GDP growth target is to be at 9.5% and India is doing better than how it was doing in June 2021, the repo rates will stay at 4%.
Monetary policy transmission mechanism.
WHAT IS REVERSE REPO RATE?
When the economy has excess money circulating in the country, this rate is used by the central bank of a country to pay its commercial banks. The RBI uses this rate to pay the other banks so that they can park their excess funds with the RBI. Reverse repo rate is also a monetary policy as the RBI regulates the cash flow of money using this tool. The RBI borrows money from commercial banks and pays them interest as per this reverse repo rate.
THE GAP (RATE CORRIDOR)
You might have noticed that no matter what time it is, the reverse repo rate is generally lower than the repo rate. While repo rate is used to regulate liquidity in the economy, reverse repo rate is used to control cash flow in the market.
In an inflated economy, RBI increases the reverse repo rate to encourage commercial banks to make deposits in the central bank and earn money in form of returns. This in turn absorbs excessive funds from the market and reduces the money available for the public to borrow.
THE EXPECTATIONS FROM THE POLICY
Many expected a rise in the reverse repo rates, which would have started the normalisation process of the gap between the repo and the reverse repo rates. The expansionary budget, concerns on inflation because of surging oil prices and the actions of other central banks globally were the other factors for which such expectations were held.
OTHER UPDATES
The policy was well received by the experts.