Economy
RBI in Mid-Quarter Monetary Policy Review
Reserve Bank of India (RBI) in its mid-quarter Monetary
Policy Review, announced on 18 December 2013, has kept the policy rate unchanged
at 7.75%. The move was unexpected in light of the recent spike in inflation,
especially food inflation. This has come as welcome relief for the industry
which already is battling gloomy economic environment as indicated 1.8% growth
in industrial output in November 2013. The RBI’s policy decision to keep the
policy rate unchanged is based on the assessment that there exists great deal of
uncertainty with respect to the short-term path of inflation from its high
current levels. Besides, given the weak state of the economy, RBI felt that it
would be unwise to adopt an overtly reactive policy action. It would be more
prudent to determine the lag-effect of monetary policy.
Thus, on the basis of an assessment of the current and evolving
macroeconomic situation, the RBI decided to:
- Keep the policy Repo Rate under the Liquidity Adjustment Facility (LAF)
unchanged at 7.75%, and
- Keep the Cash Reserve Ratio (CRR) of scheduled banks unchanged at 4.0%
of the Net Demand and Time Liability (NDTL).
As a result, the reverse repo rate under the LAF will remain unchanged at
6.75%, and the Marginal Standing Facility (MSF) rate and the Bank Rate at 8.75%.
About Policy Rates
Basis points: It is the increase in interest rates in
percentage terms. For instance, if the interest rate increases by 50 basis
points (bsp), then it means that interest rate has been increase by 50%. One
percentage point is broken down into 100 basis points. Therefore, an increase
from 2% to 3% is an increase of one percentage point or 100 basis points.
Repo rate: Repo rate is the policy rate and is part of
RBI’s Liquidity Adjustment Facility (LAF). It is the rate at which commercial
banks borrow from the RBI by selling their securities or financial assets to the
RBI for a short-period of time. It comes with an agreement that the sold
securities will be repurchased by the commercial banks from the RBI at a future
date at predetermined price. The repo rate is used by the central bank to
increase liquidity in the system.
Reverse repo rate: Reverse Repo Rate is also a part of
LAF. It is the rate of interest at which the central bank borrows funds from
other banks for a short duration. The banks deposit their short term excess
funds with the central bank and earn interest on it. This rate is used by the
central bank to absorb liquidity from the economy. Generally it is one
percentage less than the Repo rate. Bank rate: The only way the bank rate is
different from the repo rate is that the bank rate is the rate at which banks
borrow money from the central bank without any sale of securities. It is
generally for a longer period of time.
