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RBI leaves repo rate unchanged at 6.50%
Why in the news ?
- The Reserve Bank of India (RBI) in its fourth bi-monthly meet today left the repo rate unchanged at 6.50%.
- The reverse repo rate remains at 6.25 per cent.
More in the news
- The policy announcement weakened the rupee further and sent the Sensex tumbling 800 points.
- Rate hike expectations were running high after the U.S. Fed increased the rate in the last week of September and also because the rupee was under severe stress.
- The RBI action seems to indicate that it was more worried about liquidity and hardening of bond yields than inflation as it lowered its forecast.
- The monetary policy stance has changed from neutral to ‘calibrated tightening’.
- The RBI stated that headline inflation is estimated to accelerate to 4.5 per cent by March 2019 quarter with upside risks.
- The central bank also stated in its policy document that FY19 GDP growth target remains unchanged at 7.4 per cent.
- CPI inflation is seen at 4 per cent in July-September and 3.9-4.5 per cent in October-March.
- As per the Monetary Policy Committee (MPC), following pose substantial risks to the growth and inflation outlook :
- Global headwinds in the form of escalating trade tensions,
- Volatile and rising oil prices, and
-Tightening of global financial conditions
- It is, therefore, imperative to further strengthen domestic macroeconomic fundamentals, MPC said.
Concepts
The Monetary Policy Committee (MPC) :
- It is a committee of the Central Bank in India (Reserve Bank of India), headed by its Governor.
- MPC is entrusted with the task of fixing the benchmark policy interest rate (repo rate) to contain inflation within the specified target level.
- The Monetary Policy Committee (MPC) is formed under the RBI with six members.
- Three of the members are from the RBI while the other three members are appointed by the government.
Repo Rate :
- Repo rate is the rate at which the Reserve Bank of India lends money to commercial banks in the event of any shortfall of funds.
- Repo rate is used by monetary authorities to control inflation.
- In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank.
- This ultimately reduces the money supply in the economy and thus helps in arresting inflation.
Source
The Hindu.