PCI-Current Affairs

RBI cuts rate, but doesn’t ease stance: what does it really mean ….

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) today cut repo rate, or its key lending rate, by 25 basis points to 6 per cent - the lowest since November 2010. 

Falling inflation allowed the central bank to focus on boosting the economy which grew at the slowest pace in over two years in the January-March quarter. Banks could lower lending rates further, making loans cheaper. 

RBI chief Urjit Patel, addressing the media, said banks have scope for lowering lending rates further in some segments where transmission of lower rates.

The decision of the MPC was consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term inflation target of 4% within a band of +/- 2%, while supporting growth. 

Policy Rates :

Repo Rate and Reverse Repo Rate

Repo rate is the rate at which RBI lends to its clients generally against government securities. Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and increase in Repo rate discourages the commercial banks to get money as the rate increases and becomes expensive. It was reduced by 25 basis points to 6%. The rate cut comes after a slump in food prices in consumer inflation to a record low of 1.54%.

Reverse Repo rate is the rate at which RBI borrows money from the commercial banks. It was reduced by 25 bps to 5.75%.

Cash Reserve Ratio

Cash Reserve Ratio is a certain percentage of bank deposits which banks are required to keep with RBI in the form of reserves or balances. the CRR is 4.00 percent ,it was unchanged at 4%. The RBI uses the CRR to drain out excessive money from the system.

Statutory Liquidity Ratio

Every financial institution has to maintain a certain quantity of liquid assets with themselves at any point of time of their total time and demand liabilities. These assets have to be kept in non cash form such as G-secs precious metals, approved securities like bonds etc.

This will be reduced to 20% with effect from 24th June 2017 in line with the changes in RBI Credit Policy, means it was unhanged 20%

Monetary Policy Committee(MPC)

Monetary policy is the process by which monetary authority of a country , generally central bank controls the supply of money in the economy by its control over interest rates in order to maintain price stability and achieve high economic growth. In India, the central monetary authority is the Reserve Bank of India (RBI). It is so designed as to maintain the price stability in the economy.

The Monetary Policy Committee is entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level. As per the provisions of the RBI Act, out of the 6 Members of Monetary Policy Committee, 3 Members will be from the RBI and the other 3 Members of MPC will be appointed by the Central Government.