REPO RATE PAUSE
1.Context
The Reserve Bank of India (RBI) kept the repo rate unchanged at 6.5 per cent amid concerns over the global banking crisis
Even as the central bank expects retail inflation to moderate to 5.2 per cent in FY 2023-24, it pointed out that core inflation for non-food, non-fuel component could stay elevated due to lagged pass-through of input costs.
2. Unchanged Repo rate
- The decision to keep the repo rate unchanged was taken unanimously by the six-member Monetary Policy Committee (MPC)
- The MPC decided by a majority of five out of six members, to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth
- The MPC’s decision to pause in its first meeting of the current financial year will give relief to borrowers as the external benchmark based lending rate (EBLR), which are linked to repo rate, will not increase
- The RBI has raised the repo rate by 250 basis points (bps) since May 2022, thereby increasing the EBLR by 250 bps. Banks have also raised the lending rate linked to marginal cost of funds-based lending rate (MCLR) in the past 11 months
3. Reasons for the Repo rate Pause
- The RBI underlined risks from protracted geopolitical tensions, tight global financial conditions and global financial market volatility to its monetary policy outlook. “Global financial market volatility has surged, with potential upsides for imported inflation risks,”
- Concerns over slowing consumption and tepid private investment have been emerging in policy quarters, with many seeing high-interest rates as a crucial factor in dampening demand
- The pause by the RBI will help favour the growth-inflation tradeoff towards the former
- This comes in the backdrop of many global agencies lowering India’s growth forecasts for this financial year amid expectations of global economic slowdown and monetary tightening by other countries
- Negative real interest rates: a situation where the inflation rate is higher than the nominal interest rate
- The government has been leaning in favour of a benign pace of rate hikes by the RBI, citing the need for a de-linking of monetary policy stance from that of central banks of developed economies
4. Growth Projection
The RBI has projected real GDP growth for 2023-24 at 6.5 per cent. This is higher than the forecast of 6.4 per cent made in the February 2023 policy
While the change is marginal, it suggests an improvement in economic conditions. However, there are downside risks to this forecast
As per other estimates, growth is likely to slow down sharply from 7 per cent in 2022-23
For instance, the World Bank has recently pegged the Indian economy to grow at 6.3 per cent in 2023-24, while others such as Crisil expect it to be lower at 6 per cent, as global growth slows down and the full impact of higher domestic rates is felt across the economy
5.Monetary Policy Committee
- The Monetary Policy Committee is the monetary authority of a country that regulates the supply of money in the economy through monetary policy decisions.
- In general, monetary policy modulates inflation or interest rates in order to ensure price stability and predictable exchange rates with foreign currencies.
- The Monetary Policy Committee in charge of monetary policy in accordance with the government's development goals.
- The Reserve Bank of India Act, 1934 empowers the Reserve Bank of India (ie MPC) to set monetary policy under Section 45ZB.
- Monetary policy can be either contractionary or expansionary, and it is frequently distinguished from fiscal policy, which deals with taxes, government spending, and borrowing.
- The MPC comprises six members - three officials of the Reserve Bank of India and three external members nominated by the Government of India.
- The RBI Governor acts as the ex-officio Chairman of the MPC. Three of the six-member Monetary Policy Committee are external representatives and their appointment is for a term of four years and they are ineligible for re-appointment.
- As per the Reserve Bank of India Act, 1934, the central bank is required to organize at least four meetings of the MPC in a year.
5.1.Instruments used to regulate Monetary policy
- Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF).
- Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.
- Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term repo auctions. Progressively, the Reserve Bank has increased the proportion of liquidity injected under fine-tuning variable rate repo auctions of a range of tenors. The aim of the term repo is to help develop the interbank term money market, which in turn can set market-based benchmarks for the pricing of loans and deposits, and hence improve the transmission of monetary policy. The Reserve Bank also conducts variable interest rate reverse repo auctions, as necessitated under the market conditions.
- Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow an additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks to the banking system.
- Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.
- Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes.
- Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such percentage of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India.
- Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to maintain in safe and liquid assets, such as unencumbered government securities, cash and gold. Changes in SLR often influence the availability of resources in the banking system for lending to the private sector.
- Open Market Operations (OMOs): These include both, outright purchase and sale of government securities, for injection and absorption of durable liquidity, respectively.
- Market Stabilization Scheme (MSS): This instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through the sale of short-dated government securities and treasury bills. The cash so mobilized is held in a separate government account with the Reserve Bank.
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For Prelims: Monetary Policy, Inflation, GDP, Interest rates
For Mains:
1. What are the pros and cons of raising interest rates for an economy. (250 Words)
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Previous Year Questions:
If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do? (2020) (1) Cut and optimize the Statutory Liquidity Ratio (2) Increase the Marginal Standing Facility Rate (3) Cut the Bank Rate and Repo Rate Select the correct answer using the code given below: A. 1 and 2 only B. 2 only C. 1 and 3 only D. 1, 2 and 3 Answer (B) |
Source: indianexpress
