Repo Rate

Repo Rate

Subject – Economy

Context – ‘Policy support key to sustain recovery’

Concept –

• With Real interest rates (interest rate minus inflation rate) turning negative, and erosion in the returns of savers, a large section of bankers say the Monetary Policy Committee (MPC) of the RBI— scheduled to meet August 4-6 — may adopt a status quo on policy rates in the near future.
• Technically, bank deposits are fetching negative real returns of nearly one per cent (-0.99 per cent) as one-year fixed deposit rate has come down to 5.10 per cent (State Bank of India rate) whereas inflation in June was 6.09 per cent.

Repo and Reverse 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. Here, the central bank purchases the security.
• Reverse repo rate is the rate at which the RBI borrows money from commercial banks within the country.

Liquidity Adjustment Facility (LAF):

• It is a tool used in monetary policy by the RBI that allows banks to borrow money through repurchase agreements (repos) or for banks to make loans to the RBI through reverse repo agreements.

Monetary Policy Committee

• The Monetary Policy Committee is a statutory and institutionalized framework under the Reserve Bank of India Act, 1934, for maintaining price stability, while keeping in mind the objective of growth.
• An RBI-appointed committee led by the then deputy governor Urjit Patel in 2014 recommended the establishment of the Monetary Policy Committee.
• The Governor of RBI is ex-officio Chairman of the committee.
• The committee comprises six members (including the Chairman) – three officials of the RBI and three external members nominated by the Government of India.
• Decisions are taken by majority with the Governor having the casting vote in case of a tie.
• The MPC determines the policy interest rate (repo rate) required to achieve the inflation target (4%).