Tag: repo rate

Reserve Bank of India Minutes: Rising inflation, oil prices most important concerns for Monetary Policy Committee

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI) on Wednesday released minutes of the meeting of Monetary Policy Committee (MPC) held between June 4 and June 6, 2018.

The RBI’s MPC unanimously voted to raise interest rate by 25 basis points at the meeting.

The meeting was attended by all the members – Dr Chetan Ghate, Professor, Indian Statistical Institute; Dr Pami Dua, Director, Delhi School of Economics; Dr Ravindra H. Dholakia, former Professor, Indian Institute of Management, Ahmedabad; Dr Michael Debabrata Patra, Executive Director (the officer of the Reserve Bank nominated by the Central Board under Section 45ZB(2)(c) of the Reserve Bank of India Act, 1934); Dr Viral V. Acharya, Deputy Governor in charge of monetary policy – and was chaired by Dr Urjit R. Patel, Governor.

RBI governor Urjit Patel said, “A key risk to inflation cited in the MPC’s April 2018 resolution has since materialised; crude oil prices have risen sharply by over 12 per cent even as there was some moderation in recent days. On the positive side, food inflation has continued to be benign. On the whole,
11 inflation in March and April has behaved more or less on the lines of the path projected in the April resolution.”

On oil, he said, “The recent increase in oil prices, by impacting disposable incomes, may have some adverse impact on private consumption.”

Patel concluded, “Inflation risks have increased since the April policy. I, therefore, vote for an increase in the policy repo rate by 25 basis points. In view of prevailing uncertainties, it is apposite to maintain the neutral stance so as to respond to the evolving situation in a flexible manner.”

Chetan Ghate, member of the MPC, said, “Both the Reserve Bank of India and the Government of India should be congratulated in calibrating a monetary- fiscal mix that has helped engender this disinflation. Good luck helped with this outcome but so did good policy.”

He added, “Inflation targeting however can truly become successful if the inflation target and the inflation forecast become identical on a durable basis. Locking in the 4 percent medium target therefore requires continual vigilance.”

The RBI has projected retail inflation for 2018-19 to remain between 4.8 percent to 4.9 percent in the first half of the year followed by 4.7 percent in the second half.

Ghate further said, “The revival of growth brings new inflationary risks that need to be carefully watched. The RBI’s enterprise surveys suggest that upward pressures in input and staff costs are being marked by an increase in selling prices. Staff costs in services increased by 6.6%, and 11.6% in manufacturing compared to the last round of the survey.”

Explaining his rationale for an increase in repo rate, Ghate said, “The combination of cost-push and demand-pull factors at the current juncture has put one-year ahead inflation projections significantly above 4%. This warrants a monetary policy response. However, because of uncertainty surrounding the price of oil, and the nascent recovery of the economy, it would be opportune to take small steps.”

Pami Dua reasoned, “The upside risks to inflation include geopolitical risks associated with crude oil prices, increase in other global commodity prices, implementation of HRA revisions (state governments), increase in kharif minimum support prices, fiscal slippage and a weaker Indian rupee. The downside risks include forecast of a normal monsoon, and moderation in global commodity prices due to slowdown in global growth.”

Casting doubts on global growth recovery, Dua said the global manufacturing Purchasing Managers’ Index fell to a nine-month low in May, underscoring a moderating global industrial growth outlook. Growth in ECRI’s Indian Leading Exports Index is in a deepening cyclical downswing, suggesting that Indian export growth will remain in a cyclical downtrend at least for the next couple of quarters. Moreover, India’s domestic growth outlook is lacklustre, at best, according to ECRI’s Indian Leading Index.

She said, “In the meantime, with underlying inflation pressures in a cyclical upswing, according to ECRI’s US Future Inflation Gauge, US inflation has also been on the rise, and is now at the Federal Reserve’s 2% inflation target. At the same time, the unemployment rate has dropped to an 18-year low, spurring the Fed to keep tightening monetary policy.”

She concluded, “In India, with hardening of actual inflation, rising inflation expectations along with prevailing upside risks to inflation, I vote for an increase in the repo rate by 25 basis points while retaining the neutral stance.”

Ravindra Dholakia said, “Oil prices have further firmed up and geo-political developments indicate no respite likely on that count soon. For the next 12-18 months, the oil prices are likely to stay at higher level adding to the twin deficits (fiscal and current account) and inflationary pressures.”

He said, “We may note that the impact on consumers’ inflationary expectations of an oil price increase is almost 4 to 5 times higher than the similar increase in food prices and, therefore, we have to consider these numbers cautiously.”

He added, “The upside risks to inflation such as MSP revision and HRA revision implementation by states are likely to be countered by reconfirmed normal monsoon forecasts and the lack of fiscal space in several states. Oil prices could turn on either side and hence present a genuine risk. There are chances that headline CPI prints in the coming months (H1) may turn out to be
lower than expected by RBI (i.e. 4.8-4.9 per cent inflation) and in such a case, the inflation forecast 12 months ahead may come down. Although such possibilities are not ruled out, their chances are less.”

Michael Debabrata Patra said, “In my view, the prolonged period of staying on hold is denting the credibility of the MPC’s commitment to maintaining inflation at the centre of the target band.”

He said there is a rising risk that the public may start discounting this commitment: if it begins to believe that the MPC is willing to tolerate inflation in higher reaches, inflation expectations can be set adrift.

Patra said, “The major upside risks to inflation that the MPC has worried about in past resolutions are crystallising on an ongoing basis.”

Justifying his vote for a 25 basis points interest rate hike, he said, “In my view, the time has come for the MPC to act unanimously to raise the policy rate
by 25 basis points in a closing sliver of opportunity. This will demonstrate our resolve to  return inflation to the centre of the target band. Monetary policy has to step in before it is too late and guide the economy along a non-accelerating inflation growth path.”

RBI deputy governor Viral Acharya said, “The inflationary pressure also seems to be experienced by the common man. The Reserve Bank of India (RBI)’s Inflation Expectations Survey (IES) of households reveals a uniform picture of hardening of inflation expectations whichever way one  looks at the
data. Most notably, the 3-month ahead and 12-month ahead inflation expectations have increased sharply by 90 basis points (bps) and 130 bps, respectively, since the last survey. They are likely explained by the fact that petrol and diesel prices carry salience: fuel prices are in the face and generalise rapidly through transportation costs into prices of general goods
and services.”

On oil prices, he said, “A key uncertainty at present relates to the oil price development over medium-term horizon that monetary policy operates at. Robust global growth, OPEC and Russian supply cuts, supply shock in Venezuela, and geo-political uncertainty around the Iranian supply have
all pushed international crude prices uncomfortably high in a short span of time.”

Explaining his stance, Acharya said,  “Considerable uncertainties
around oil and food prices as well as the playing out of trade wars and global financial market outcomes led me to keep the stance neutral. It will allow the MPC to determine in a flexible manner what further monetary policy response is warranted based on an ongoing assessment of the inflation situation, inflation expectations and growth prints in the coming months.”

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Goldman Sachs sees slightly easier China monetary policy amid trade tiff with US

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Goldman Sachs said it expected China to adopt a slightly easier monetary stance in the face of tit-for-tat tariffs between Beijing and Washington that, while likely to have limited immediate impact on the economy, were at risk of escalating.

On Friday, the Trump administration imposed tariffs on $50 billion of imports from China, a move that came on top of hefty duties on steel and aluminum imports implemented at the start of June. China retaliated swiftly by announcing reciprocal tariffs on US products, ranging from soybeans and autos to seafood.

Goldman Sachs analysts forecast that the negative growth impact on China of the tariffs would be 10-20 basis points of gross domestic product (GDP), while the effects on Chinese consumer price index (CPI) inflation would be “modest, on the order of 10-20 basis points”.

Goldman has forecast China’s gross domestic product growth to be 6.6 percent this year. Last week, it said it expected inflation to remain “mild” in coming months after the May CPI number came in unchanged at 1.8 percent year-on-year.

“The tariffs announced thus far should have relatively small macro effects, but there is clearly a risk of further escalation,” its analysts wrote in a note late Sunday.

Goldman also adjusted its forecasts for the reserve requirement ratio in China and the rate on the country’s seven-day reverse repurchase agreements, the tool of choice for the central bank in managing interbank liquidity, reflecting “an expectation of slightly easier policy going forward”, they wrote.

The investment bank lowered its forecast for the seven-day repo rate to 2.75 percent from 3 percent at year-end, and said it expected the People’s Bank of China to cut the reserve requirement ratio by 50 basis points per quarter for the rest of the year.

In April, the PBOC unexpectedly cut the RRR by 100 basis points to 16 percent for large institutions and 14 percent for smaller banks.

The tariffs are scheduled to take effect in July, leaving some room for discussions to head them off.

But Wang Jun, the Beijing-based chief economist at Zhongyuan Bank, thinks China and the United States have entered a “talk and fight” era in which trade frictions will become normal and the impact will be unavoidable.

“We are likely to see a cold war from economics to other areas,” he said. “We should be ready for sustained conflict and long-term frictions and maneuvering between the two countries.”

The tariffs come at a time when China’s economy is already showing signs of weakness, but while the spat adds to headwinds “they point to a slowdown not a slump”, Mark Williams, chief Asia economist at Capital Economics, wrote in a note.

The impact will be small – even if the US tariffs are tripled, as the Trump administration has threatened – amounting to probably “well under” half a percent of GDP for China.

“And that could be offset by policy loosening,” he wrote.

“Neither side will be brought to its knees – which is one reason to think the trade dispute could drag on.”

Lu Zhengwei, chief economist at Industrial Bank in Shanghai, said the Chinese countermeasures would eventually eat into US jobs, but China would feel little impact from the tariffs against its exports.

Economists have said the impact on the US economy would be muted.

“Chinese exports of products under the new tariffs to the US will be affected but not other overseas markets. China’s market is big enough to support the development of relevant industries. Hence, its impact on the economy is limited,” Lu said.

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RBI’s rate increase upsets Modi’s election year budget maths

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The central bank’s first interest rate rise since Prime Minister Narendra Modi came to power could not have come at a worse time for a government grappling with spending constraints, voter discontent in the rural heartlands and rising oil prices.

The rate increase, the first in more than four years, is likely to be followed by one or two more this year, economists predict, pushing up overall borrowing costs for the government and companies alike.

Higher interest rates are likely to make it tougher for the government to borrow from the market and hurt a recent pick-up in the economy, while dampening revenue collection and burning a bigger hole in the government’s fiscal deficit than the budgeted target of 3.3 percent of gross domestic product (GDP).

For Modi that represents a double whammy, as he looks to step up spending to woo disgruntled voters ahead of a general election next year without spooking skittish foreign investors. The fiscal maths are getting challenging on rising fuel prices, a weakening rupee and subdued investments.

“This could be the worst year for us, as budget calculations are under stress,” a senior finance ministry official, who declined to be named, told Reuters, adding there was a worry of at least one more rate hike by December.

“The rising crude oil prices are already giving sleepless nights as the government may have to cut tax on fuel products sooner rather than later,” the official added.

India’s economy grew at 7.7 percent in the first three months of the year, the fastest pace in nearly two years. That would be an impressive clip for most countries, but more is needed to create enough new jobs for the 1 million young people entering the country’s workforce each month.

FEELING THE PRESSURE

The government’s spending plans have already been threatened by setbacks to flagship reforms.

An estimated $1.2 billion-$1.5 billion Air India privatisation plan flopped when the stake it was selling in the flag carrier failed to attract a single bid by last week’s deadline, putting at risk its 800 billion rupees ($11.93 billion) divestment target.

Meanwhile, the sovereign 10-year bond yield has risen by 60 basis points since start of the fiscal year in April, and is near a three-year high due to a lack of investors. Similarly top-rated corporates, including National Bank for Agriculture and Rural Development, Small Industries Development Bank of India and National Housing Bank, have deferred their bond issuance plans due to a lack of buyers.

To top this, foreign holders have sold a net $4.3 billion of Indian debt so far this year as investors have grown wary of emerging economies facing twin fiscal and current account deficits and higher inflation that could pose overheating risks.

The stock market has held up so far, but some analysts caution that concerns over a loosening of fiscal discipline ahead of the election could trigger equity outflows as well.

The Reserve Bank of India (RBI) raised its key repo rate on Wednesday by 25 basis points to 6.25 percent – the first change since a cut of the same size in August last year – as higher oil prices, a sharp fall in the rupee and potential stronger consumer spending threatened to spur inflation beyond its 4 percent medium term target.

“The rate hike will push up the government’s interest financing cost and add to the fiscal deficit pressure on one hand,” said Soumya Kanti Ghosh, chief economist at State Bank of India. “And on the other hand, the nascent recovery in growth on the back of consumption demand will also slow down as retail lending rates will go up sooner than later.”

MODI’S ELECTION BUGLE

After a setback at a by-election in India’s most populous state last week showed Modi’s waning popularity in the countryside, where most Indians still live, the government has stepped up its so-called populist spending to please the voters.

Already the government has unveiled a support package for sugar farmers to put a floor under prices that could cost about 40 billion rupees ($597 million) outside the budget.

Further measures, including loan waivers to farmers by regional governments, higher minimum purchase prices for grains, fuel subsidies to prevent pump prices from rising sharply and higher than budgeted rural wage payouts could blow a big hole in the fiscal deficit.

That could set up the RBI for a face-off with the government and also prompt further rate increases after it warned in its monetary policy statement that moving away from the fiscal deficit roadmap could push up inflation risks.

“India’s combined fiscal deficit is already quite high and since this is an election year, both state and central governments are coming up with populist spending steps which will push up the fiscal deficit and add to inflation pressures,” said A Prasanna, chief economist at ICICI Securities Primary Dealership. “This increases the probability of further rate hikes.”

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15 key takeaways from the RBI’s June 6 monetary policy

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India has raised the repo rate, the rate at which the bank lends money to commercial banks, by 25 basis points to 6.25%.

India’s central bank also raised the reverse-repo rate by 25 basis points to 6%.

A majority of the bankers were expecting the RBI to be more hawkish than the last policy and change their neutral stance.

Here are the top 15 takeaways from the second of the monetary policy committee (MPC):

1. Excluding the impact of HRA revisions, CPI inflation is projected at 4.6 per cent in H1 and 4.7 per cent in H2.
2. Retail inflation, measured by the year-on-year change in the CPI, rose sharply to 4.6 per cent in April, driven mainly by a significant increase in inflation excluding food and fuel. Excluding the estimated impact of an increase in house rent allowances (HRAs) for central government employees, headline inflation was at 4.2 per cent in April, up from 3.9 per cent in March.
3. On the basis of an overall assessment, GDP growth for 2018-19 is retained at 7.4 per cent as in the April policy. GDP growth is projected in the range of 7.5-7.6 per cent in H1 and 7.3-7.4 per cent in H2, with risks evenly balanced.
4. Food inflation moderated for the fourth successive month, pulled down by vegetables due to lower than the usual seasonal increase in their prices, and pulses and sugar which continued to experience deflation. However, within the food group, inflation increased in respect of cereals, fruits, prepared meals, meat and fish.
5. While net foreign direct investment in 2017-18 was broadly comparable with the previous year, net foreign portfolio flows were stronger due to a sharp turnaround in debt inflows. However, foreign portfolio investors withdrew US$ 6.7 billion on a net basis from the domestic capital market in 2018-19 (up to June 4) reflecting volatility in global financial markets. India’s foreign exchange reserves were at US$ 412 billion on June 1, 2018.
6. Gross domestic product (GDP) growth for 2017-18 has been estimated at 6.7 per cent, up by 0.1 percentage point from the second advance estimates released on February 28.
7. Estimates of agriculture and allied activities have been revised upwards, supported by an all-time high production of foodgrains and horticulture during the year. On a quarterly basis, agriculture growth increased sharply in Q4 of 17-18.
8. Industrial growth also strengthened, reflecting the robust performance of manufacturing, which accelerated for three consecutive quarters in Q4. Capacity utilisation by manufacturing firms increased significantly in Q4 2017-18.
9. The output of eight core industries accelerated in April on account of a sharp expansion in coal production, which reached a 42-month peak. Cement output also posted double-digit growth for the sixth consecutive month in April. However, electricity generation slowed down.
10. the manufacturing PMI remained in an expansionary mode for the tenth consecutive month in May on the back of new domestic orders and exports.
11. Liquidity in the system remained generally in surplus during April-May 2018. During April, the Reserve Bank absorbed surplus liquidity of ₹496 billion on a daily net average basis due to increased government spending, especially in the second half of the month. Reflecting easy liquidity conditions, the weighted average call rate (WACR) softened to 5.89 per cent in April (from 5.96 per cent in March).
12. The Reserve Bank conducted an open market operation purchase auction on May 17, 2018 to inject liquidity of ₹100 billion into the system. The system again turned into surplus in the last week of May reflecting mainly the payment of food subsidies. Surplus liquidity absorbed under the LAF on a daily net average basis declined to ₹142 billion in May. The WACR in May at 5.88 per cent remained broadly at the April 2018 level.
13. India’s exports grew in April 2018 after a marginal dip in the preceding month, supported mainly by non-oil exports, particularly engineering goods and chemicals. Import growth decelerated sequentially in April 2018; a significant decline in imports of gold as well as pearl and precious stones more than offset the impact of rising crude oil prices. Nevertheless, the trade deficit expanded in March and April from its level a year ago.
14. Domestic economic activity has exhibited sustained revival in recent quarters and the output gap has almost closed. Investment activity, in particular, is recovering well and could receive a further boost from swift resolution of distressed sectors of the economy under the Insolvency and Bankruptcy Code.
15. Geo-political risks, global financial market volatility and the threat of trade protectionism pose headwinds to the domestic recovery. It is important that public finances do not crowd out private sector investment activity at this crucial juncture. Adherence to budgetary targets by the Centre and the States – which appears to be the case thus far – will also ease upside risks to the inflation outlook considerably.

Read our extensive coverage of the RBI policy meet here.

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Monetary Policy Committee, RBI’s inflation warriors

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI) is to announce its decision on a rate hike in its second bi-monthly monetary policy meeting review on Wednesday.

The Monetary Policy Committee (MPC), which was put to effect by the Reserve Bank of India Act, 1934, is responsible to formulate, implement and monitor the monetary policies, based on the current trends in economy in India and around the world.

Let’s take a look at what exactly the MPC does to get the economy of the country to function smoothly.

The MPC thrives to have a modern monetary policy framework in place to meet the challenges of an increasingly complex economy, while maintaining a price stability based on short-term, medium-term growth and inflation projections.

It’s the prerogative of RBI to protect the depositors’ interest and provide cost-effective banking services to the public.

The banking sector is highly dependent on the policy and interest rate changes made by the committee, which eventually sets the lending rates for the banks, helping with the credit system of the country to its advantage.

In its first bi-monthly meeting, MPC kept the rates unchanged at 6%. MPC acts as a last resort as a lender for banks who are about to go under the hammer or bankruptcy.

>>Follow our full coverage of RBI Monetary Policy here

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Key resolutions taken by RBI at April Monetary Policy Committee Meet

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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As Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) is meeting from June 4-6 to decide the key interest rates, CNBC-TV18 looks at the key resolutions taken by the first bi-monthly monetary policy meeting in April.

Here are the few key takeaways from the previous MPC meeting:

1.  In its first bi-monthly policy meeting, MPC kept the repo rate unchanged at 6% and the reverse repo rate unchanged  at 5.75% under the liquidity adjustment facility (LAF).
2. The MPC’s decision was consistent with the neutral stance of monetary policy in achieving a medium-term target for consumer price index (CPI) inflation of 4%.
3. The projected CPI inflation for 2018-19 was revised to 4.7-5.1% in H12018-19 and 4.4% in H2, including the House Rent Allowance (HRA) impact for central government employees, with risks tilted to the upside. Excluding the impact of HRA revisions, CPI inflation is projected at 4.4-4.7% in H12018-19 and 4.4% in H2.
4. Retail inflation, measured by the year-on-year change in the
   Consumer Price Index (CPI), fell from a high of 5.1%  in January to 4.4% in February due to a decline in inflation in food and fuel.
5. Inflation in respect of liquefied petroleum gas declined in line with international price movements. Furthermore, the rate of increase in prices of firewood and chips and dung cake moderated.
6. The CPI inflation excluding food and fuel remained unchanged at 5.2% for the third consecutive month in February, after rising from its trough in June 2017.
7. Liquidity in the system moved between surplus and deficit during February-March 2018. From a daily net average surplus of  Rs 272 billion during February 1-11, 2018, liquidity moved into deficit during February 12-March 1, reflecting a slowdown in government spending and large tax collections.
8. In mid-March, additional liquidity of Rs 1 trillion got released into the system through redemption of Treasury Bills issued under the Market Stabilisation Scheme (MSS) in April and May 2017.
9. On the whole, the RBI  injected Rs 60 billion and Rs 213 billion on a net daily average basis in February and March, respectively. The weighted average call rate (WACR) inched closer to the policy repo rate from 12 basis points below the policy rate in January to 7 bps in February, and 5 bps in March.
10. Net foreign direct investment moderated in April-January 2017-18 visà-vis the level a year ago. Foreign portfolio investors made net purchases in 2017-18, despite net sales in the wake of a global sell-off in February. India’s foreign exchange reserves were at $424.4 billion on March 30, 2018.

For full text: RBI keeps repo rates unchanged at 6%; key takeaways

>>Follow our full coverage of RBI Monetary Policy here

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Know the faces on the RBI’s Monetary Policy Committee

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The market is eagerly waiting for Reserve Bank of India’s (RBI) announcement on the interest rate changes in its second bi-monthly monetary policy meeting review on Wednesday.

The Monetary Policy Committee (MPC), which takes the decisions on the same, was put to effect by the RBI Act, 1934 and is comprised of six members, three of which are members of the RBI, while the rest are appointed by the Government of India.

Here are the who’s who of the MPC:

Urjit R. Patel, Governor, Reserve Bank of India:

The Governor of RBI, since 2016, is the head of the committee responsible to formulate, implement and monitor the monetary policies, based on the current trends in economy in India and around the world.

A Ph.D holder from the Yale University, Patel is the 24^th RBI Governor and has the veto power in case of a tie, while deciding the rates.

Previous to his appointment as the governor, Patel served as the deputy-governor of the central bank for six years and has worked with the International Monetary Fund (IMF).

Viral V. Acharya, Deputy Governor, in-charge of Monetary Policy:

The youngest deputy governor, Viral Acharya, took the post in 2016 and has been a part of the committee since.

He has also served on the international advisory board of the Securities and Exchange Board of India (Sebi).

In the first bi-monthly policy meeting of RBI in April, Acharya said he would vote for either a neutral to ‘withdrawal of accommodation’ in the upcoming meeting, citing an upside risk to inflation.

Michael Debabrata Patra, Executive Director:

Michael Patra is one of the three member of RBI and serves as the executive director of the MPC since 2014. Patra was nominated by the central board under Section 45ZB(2)(c) of the Reserve Bank of India Act, 1934

The director of Export-Import Bank, Patra in one of his speech said, “Monetary policy decision making is always complex and severely testing. It is typically undertaken in an explosion of diverse views, each differing from the other in expressing intensity and fervour.”

Ravindra H. Dholakia, Professor, IIM Ahmedabad:

A member of the development and evaluation committee at Ahmedabad’s Indian Institute of Management (IIM), Ravindra Dholakia has been the on the MPC since September 2016 onwards, appointed by the government under the Act of Parliament

Pami Dua, Director, Delhi School of Economics:

A known name in the academic circle in Delhi, Pami Dua, Director, Delhi School of Economics, has served on RBI advisory groups and was a member of the committee on data and information management constituted by the central bank in 2014.

Dua’s colleagues at the university say, she is an ideal choice to join the panel that will steer India’s monetary policy for the next four years.

Chetan Ghate, Professor, Indian Statistical Institute:

Chetan Ghate, a professor at the Indian Statistical Institute (ISI), Delhi centre, has worked extensively on economic growth, fluctuations, economic development, and monetary and fiscal policy in developing and emerging market economies.

He was one of the five members of the expert committee of RBI to revise and strengthen the monetary policy framework.

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

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RBI policy meet: What is repo rate, reverse repo rate and how is it related to inflation?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India kept the repo rate unchanged at 6.50 percent-   the rate at which it lends money to commercial banks. The reverse repo rate was also kept unchanged at 6.25 percent.

So what is repo rate and what does its change indicate?

The repo rate is the rate at which the central bank of the country will lend funds to the commercial banks. The commercial banks borrow funds only if they witness a shortfall in their funds.

The lending rate, plus the loan amount, will have to be returned to the central bank.

In theory and practice, the repo rate is used as a tool to tackle inflation and garner growth.

If the monetary policy committee of a country orders a cut in the repo rate, this means that the authorities are opening the gateway for growth at the cost of inflation.

For instance, if the repo rate is cut to 5.75% from the present 6%, the repo rate indicates more borrowing of funds by the commercial banks.

If the commercial banks pay lesser to the central bank, the commercial banks will also be willing to pass on the benefits to the consumers.

When the consumer or even a company gets enough funds, he or she can also invest in land, market and so on. If there’s investment in the economy, it will result in growth.

Since the economy is loosening up to borrowing with a repo rate cut, the market welcomes the move. The market turns bullish in trade, whenever there is a cut in the policy rate.

Consequently, if the repo rate is increased, the economy is letting go of potential growth in order to tackle the rising inflation in the economy.

Inflation is the increase in prices and fall in the purchasing value of money.

For instance, if the repo rate is increased to 6.25% from the present 6%, it will indicate lesser borrowing and more saving of funds.

If the commercial banks are expected to return a higher loan amount to the central bank, they will not be able to pass on the benefits to the consumers. The consumers will also, instead, save more instead of heading to the lenders for a loan.

The increase in the repo rate hurts the investor sentiment and the investors begin to trade cautiously in the market.

What is the reverse repo rate?

The monetary policy committee of a country uses the reverse repo rate as a tool to control the money supply in the country.

By definition, the reverse repo rate is the rate at which the central bank borrows money from the commercial banks.

The increase in the rate indicates a fall in the money supply and a cut in the rate indicates a rise in the money supply.

An increase in the rate means that commercial banks will be incentivised to park their funds with the central bank, which can help in reducing the money supply in the economy and vice-versa.

When the money supply increases, it could lead to a rise in the prices leading to inflation. The reverse repo rate is the tool used when the cause of the inflation is the increase in the money supply.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

June 5 Podcast: Trump tweets, trade tensions and RBI monetary policy on the agenda

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

Trump tweets and trade tensions trigger ahead of G-7 meeting later in the week. However, for the Indian markets , all eyes on the RBI interest rate decision on Wednesday wherein after 4.5 years the street is expecting a rate hike.

Anisha Jain talks about all that and more.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

RBI Monetary Policy: Experts see it as a good move

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

RBI’s monetary policy committee has maintained a status quo on key repo rates at 6% under the liquidity adjustment facility (LAF).

Dinabandhu Mohapatra, MD & CEO, Bank of India, Sajjid Chinoy, Asia Economics, JP Morgan and Ajay Srivastava, CEO, Dimensions Corporate Finance Services shared their view on the monetary policy.

It is a good news for everybody and it is positive for banks, said Mohapatra.

Chinoy described it as a very good move, at this point in time when it required to meet capital, discipline should be there and liquidity can be managed well.

It is definitely a relief that things aren’t going worse than what they were expected to be, said Srivastava.

Watch video for more:

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow