REPO RATE - ECONOMY

News: RBI lifts loan costs to tame inflation

 

What's in the news?

       The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) based on an assessment of the macroeconomic situation and its outlook, decided by a majority of 4 members out of 6 to increase the policy repo rate by 25 basis points to 6.50%, with immediate effect.

 

Key takeaways:

       Consequently, the standing deposit facility (SDF) rate will stand revised to 6.25%; and the marginal standing facility (MSF) rate and the Bank Rate to 6.75%.

 

Key projections:

Real GDP growth:

       Taking various factors into consideration, real GDP growth for 2023-24 is projected at 6.4% with Q1 at 7.8%; Q2 at 6.2%; Q3 at 6.0%; and Q4 at 5.8%.

 

Inflation:

       Taking into account several factors and assuming an average crude oil price (Indian basket) of US$ 95 per barrel, the inflation is projected at 6.5% in 2022-23, with Q4 at 5.7%.

 

CPI Inflation:

       On the assumption of a normal monsoon, CPI inflation is projected at 5.3% for 2023-24, with Q1 at 5.0%, Q2 at 5.4%, Q3 at 5.4% and Q4 at 5.6%.

 

Key terms in Monetary Policy:

 

1. Policy Repo Rate: 6.50% - 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.

 

2. Standing Deposit Facility (SDF): 6.25% - The SDF is a liquidity window through which the RBI will give banks an option to park excess liquidity with it. It is different from the reverse repo facility in that it does not require banks to provide collateral while parking funds.

 

3. Marginal Standing Facility Rate: 6.75% -  MSF is a window for scheduled banks to borrow overnight from the RBI in an emergency situation when interbank liquidity dries up completely. Under interbank lending, banks lend funds to one another for a specified term.

4. Bank Rate: 6.75% - It is the rate charged by the RBI for lending funds to commercial banks.

 

5. CRR: 4.50% - Under CRR, the commercial banks have to hold a certain minimum amount of deposit (NDTL) as reserves with the central bank.

 

6. SLR: 18.00% - Statutory Liquidity Ratio or SLR is the minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities.