Types of Repo Rates

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The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) reduced short-term lending rate, or repo rate, by 25 basis points to 6 % in its third bimonthly policy review for the financial year 2017 - 18.

Image Shows the Types of Repo Rates

Fiscal Policy Objective

Decision of MPC consistent with neutral stance of monetary policy with the objective of achieving medium-term inflation target of 4 % within a band of + /- 2 % , with growth.

Types of Policy Rates (Values Correct in August 2017)

  • Basis Points: Basis point (BPS) refers to unit of measure of interest rates with one basis point = 1 ⁄ 100th of 1 % , or 0.01 % (0.0001) . Usually denotes percentage change in a financial instrument.
  • Repo Rate: Rate at which RBI lends against government securities. Its reduction helps banks get money at a cheaper rate and increase in Repo rate makes it more expensive to borrow money. Reduced by 25 basis points to 6 % . Rate cut usually comes after drop in inflation numbers especially in food prices. July consumer inflation touched a record low of 1.54 % . The increase in the Repo rate increases cost of borrowing discouraging public to borrow and encouraging savings resulting in reduction in availability of credit. Demand thus decreases decreasing the inflation.
  • Reverse Repo Rate: Rate at which RBI borrows funds from banks - reduced by 25 bps to 5.75 % .
  • Marginal Standing Facility (MSF) : Short-term scheme rate at which banks can borrow funds overnight from RBI against government securities. To be used in emergency if and when inter-bank liquidity dries up. Adjusted to 6.25 % .
  • Bank Rate: Discount rate or bank rate is rate at which banks borrow money from the central bank. Bank rate has a direct impact on the loan rates offered by banks to customers. Bank rate applies on loans, whereas, repo or repurchase rate applies on securities. Bank rate is charged to commercial banks against the loan, whereas, repo rate is charged for repurchasing the securities. It was set to 6.25 % .
  • Cash Reserve Ratio (CRR) : Specified minimum % of the total deposits, which commercial banks have to hold as reserves as cash or deposits. It was unchanged at 4 % . Uses to drain out excessive money from the system.
  • Statutory Liquidity Ratio (SLR) : Apart from CRR, banks are required to maintain a proportion of net demand and time liabilities as liquid assets like cash, gold and unencumbered securities. Treasury bills, dated securities, and market stabilization schemes (MSS) form part of the SLR. It was unchanged 20 % .

About Monetary Policy Committee (MPC)

  • Committee of the Reserve Bank of India, headed by Governor.
  • Central bank of India is Reserve Bank of India
  • Set up by amending the RBI Act
  • Provide statutory and institutionalized financial framework
  • Has 6 members
  • Fixes benchmark repo rate to keep inflation range bound with maximum growth.
  • Decisions are taken by majority voting. Each member has one vote and governor has casting vote in case of tie

Composition of MPC

  • Governor of RBI (ex officio Chairperson)
  • Deputy Governor of RBI- in charge of Monetary Policy (Member)
  • Single officer of RBI (Member)
  • Three members appointed by Central Government

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