Monetary Policy & Repo Rate

RBI Monetary Policy February ,2017 is what everyone is talking about today. The Newspaper’s headline today reads that -  RBI has taken a neutral stand and has kept the Repo Rate unchanged at 6.25% at its first monetary policy review of 2017. 

Now what is meant by monetary policy and Repo Rate? Well monetary policy are policies devised by the Central Bank of the country (RBI in case of India) to control the supply of money in the economy by controlling the interest rates to maintain price stability and achieve high economic growth. There are various instruments by which RBI controls the money flow and one such instrument is the Repo Rate and Reverse Repo rate. Where Repo rate is the rate at which RBI lends money to commercial banks in the event of any shortfall of funds, Reverse Repo Rate is the rate at which it pays banks for depositing surplus funds. Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and increase in Repo rate discourages the commercial banks to get money as the rate increases and becomes expensive. Repo rate is also used as a tool to control inflation. In the event of inflation, RBI increases repo rate as this acts as a disincentive for banks to borrow from RBI. This ultimately reduces the money supply in the economy and thus helps in arresting inflation. The six-member Monetary Policy Committee, headed by RBI Governor, Urjit Patel, expects inflation to rise at 5% as against the targeted 4%. Thus, the have kept the interest rates unchanged, signalling a possible end to the downward interest cycle. Though the announcement came as a big surprise and have dashed the hopes of many of a rate cut , the rupee ended 0.32% stronger against dollar.

To read the full document of Sixth Bi-monthly Monetary Policy Statement, 2016-17 kindly visit RBI’s website.

References:

-RBI

-The Economic Times 9^th February 2017

-Monetary policy of India - Wikipedia

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