RBI and ‘Dilemma’ of Repo Rate

A 25 basis point increase was made to the repo rate, from 6.25 per cent to 6.5 per cent, on February 8, 2023, under the direction of RBI Governor Shaktikanta Das and the Monetary Policy Committee (MPC). The RBI has hiked the repo rate six times, bringing the total number of increases to 250 basis points, with the most recent rise since May of last year.

About Monetary Policy Committee

• The RBI Act, of 1934 established a statutory and standardized framework for preserving price stability while keeping growth as a goal in mind.
• The Governor of the RBI chairs the committee.
• The MPC determines what policy interest rates (also known as a repo rate) are necessary to reach the 4% inflation objective.
• A committee advised the creation of the Monetary Policy Group in 2014 that the RBI created, headed by the then-deputy Governor Urjit Patel.

The present-day policy rates are:

• MCF Rate: 6.75 %.
• SDF Rate: 6.25 %.

The policy rates before the February modification are as follows:

• SLR: 18 %.
• CRR: 4.50 %.
• Reverse Repo Rate: 3.35 %.
• Repo Rate: 6.25 %.
• MSF Rate: 6.50 %.
• SDF Rate: 6.00 %.
• Bank Rate: 6.50 %.

Why did the RBI Raise the Repo Rate?

• The RBI has increased the policy rate again, bringing the repo rate to 6.5% due to rising inflation, global economic turbulence, and uncertainty.
• Globally, central banks have kept tightening monetary conditions, albeit more gradually, indicating general agreement that interest rates should rise.
• Additionally, the removal of COVID-related limitations and China’s fast recovery in GDP are anticipated to push commodities prices upward.
• The US Federal Reserve has decelerated the rate of growth of its benchmark interest rate, and the easing of retail inflation contributes to the smaller rate hike.

An effective strategy for controlling inflation and promoting economic expansion is the 25 bps increase in the RBI-announced Repo rate. The industry had anticipated this since inflation has continued to run above the tolerance zone while having slowed down recently. Further reducing inflation in the economy will be made possible by this increase.