SYLLABUS SECTION: GS III (ECONOMY)
WHY IN THE NEWS?
Repo rate refers to the rate at which the RBI RAISES RATES lend to commercial banks.
- Recently, the Reserve Bank of India’s Monetary Policy Committee (MPC) voted unanimously to raise the repo rate by 50 basis points to 4.90%.
MAJOR HIGHLIGHTS OF THE MEETING:
- Reserve Bank of India (RBI) hiked the repo rate by 50 basis points (4.9%) (following a 40-basis-point hike on May 4).
- The repo rate currently stands at 4.90 percent while the reverse repo rate is at 3.35 percent.
- RBI has projected inflation at 7.5% in the first quarter of FY22, 7.4% in Q2, 6.2% in Q3, and 5.8% in Q4, with a baseline inflation of 6.7% for 2022-23.
THE REASONS THAT HAVE PROMPTED RBI’S MOVE:
- Federal Open Market Committee decision
- Ukraine’s Russian war is accentuating the existing supply chain disruptions.
- Geopolitical tensions result in the globalization of inflation.
- International crude oil prices are still high, with risks of further pass-through to domestic pump prices.
- Edible oil prices remain under pressure from adverse global supply conditions
- Manufacturing, services, and infrastructure sector firms polled in RBI’s surveys sow they expect further pressures on input and output prices
EFFECTS OF HIKING THE REPO RATE
- It will help in bringing down the inflation to its targeted bracket of 4% (±2%).
- When interest rates are raised, it makes money more expensive, thereby resulting in a reduction of demand in the economy and bringing down inflation
- Food, energy and commodity prices remain elevated and this raise will help in containing the price rise.
- It will increase borrowing costs across the board from those seeking loans to buy cars and homes, to MSME firms looking to raise capital.
- Savers will be benefited who have been witnessing negative real interest rates on their investment.
- It will impact consumer demand for houses, consumer durables, and other discretionary items.
- With credit to the large companies and industries just beginning to revive, the rate hike could slow down credit growth to the industry too.
· 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.
· It determines the policy interest rate required to achieve the inflation target (2% to 6%).
Reverse Repo Rate:
· It is a tool that the central bank uses to control inflation. The reverse repo rate is the rate at which the RBI borrows from banks.
· Reverse repo rate has remained unchanged since May 2020.
Marginal Standing Facility:
· MSF or marginal standing facility is a system of the Reserve Bank of India that allows scheduled commercial banks to avail funds overnight.
Read more: UPSC CURRENT AFFAIRS