RBI keeps repo rate unchanged at 6.50% for the fifth time in a row
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Doda: 08 Dec 2023: The Reserve Bank of India (RBI) governor Shaktikanta Das on Friday said that the policy repo rate has been kept unchanged at 6.50%. He said that this decision was taken unanimously by the monetary policy committee (MPC). The central bank also revised its gross domestic product (GDP) growth forecast in its recent MPC meeting.
The RBI boss said that the real GDP growth for 2023-24 is projected at 7 per cent, up from the earlier 6.5 per cent. He added that the GDP growth for Q3 is projected at 6.5 per cent and Q4 is projected at 6 per cent. GDP is likely to grow at 6.7 per cent in Q1 2024, 6.5 per cent in Q2 2024, and 6.4 per cent in Q3 2024.
In October’s monetary policy review, the central bank projected Q2 real GDP growth at 6.5 per cent, which was 110 bps lower than the actual number released by the Ministry of Statistics and Programme Implementation (MOSPI).
Moreover, Das said that the consumer price inflation (CPI) was pegged at 5.6 per cent for 2023-24, with Q3 at 5.6 per cent and Q4 at 5.2 per cent. CPI inflation for Q1 2024 is projected at 5.2 per cent, Q2 at 4 per cent and Q3 at 4.3 per cent. Risks are evenly balanced and that the target of 4 per cent inflation is still far away.
What is ‘Repo Rate’?
Definition: Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.
What is the repo rate and reverse repo rate?
Repo Rate: It is the interest rate at which the central bank of a country lends money to commercial banks. The central bank in India i.e. the Reserve Bank of India (RBI) uses repo rate to regulate liquidity in the economy. In banking, repo rate is related to ‘repurchase option’ or ‘repurchase agreement’.When there is a shortage of funds, commercial banks borrow money from the central bank which is repaid according to the repo rate applicable. The central bank provides these short terms loans against securities such as treasury bills or government bonds. This monetary policy is used by the central bank to control inflation or increase the liquidity of banks. The government increases the repo rate when they need to control prices and restrict borrowings. 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.An increase in repo rate means commercial banks have to pay more interest for the money lent to them and therefore, a change in repo rate eventually affects public borrowings such as home loan, EMIs, etc. 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. Reverse Repo Rate: This is the rate the central bank of a country pays its commercial banks to park their excess funds in the central bank. Reverse repo rate is also a monetary policy used by the central bank (which is RBI in India) to regulate the flow of money in the market.When in need, the central bank of a country borrows money from commercial banks and pays them interest as per the reverse repo rate applicable. At a given point in time, the reverse repo rate provided by RBI 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. When there is inflation in the economy, RBI increases the reverse repo rate to encourage commercial banks to make deposits in the central bank and earn returns. This in turn absorbs excessive funds from the market and reduces the money available for the public to borrow.
