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.
