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RBI RAISES RATES

UPSC CURRENT AFFAIRS | RBI RAISES RATES TO TAME INFLATION | 09TH JUNE

/ June, 2022, UPSC Daily Current Affairs

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: 

·         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