For All Defence Aspirants RBI keeps Interest Rates Unchanged Imp Terms For Economics

For All Defence Aspirants RBI keeps Interest Rates Unchanged Imp Terms For Economics

RBI keeps interest rates unchanged

The reserve bank of india (RBI) recently held its fifth bi-monthly meeting of the monetary policy committee (MPC) of FY 2018-19.

Key highlights

The MPC has decide to keep the key interest rate or the repo rate unchanged at 6.5 %.

It also maintained the calibrated tightening stance which means that in this rate cycle, rate cut is off the table and that RBI is not bound to increase rate at every meeting.

The MPC projected the consumer price index based inflation to be at 2.7-3.2 % for the second half of the current financial year and 3.8-4.2 % in the first half of the next financial year.

Monetary policy committee (MPC) the monetary policy committee (MPC) of reserve bank of India (RBI) headed by its governor, is entrusted with the task of fixing the benchmark policy interest rate (repo rate ) to contain inflation within the specified target level.

The committee was created in 2016 through amendments to RBI act 1934 ,to bring transparency and accountability in deciding monetary policy. The committee comprises six members-three officials of the reserve bank of India and three external members nominated by the government of India.

The current mandate of the committee is to maintain 4% annual inflation (consumer price index)until march 31, 2021,with an upper tolerance of 6 % and a lower limit of 2 %.the committee is answerable to the government if the consumer inflation is out of the prescribed range for three consecutive quarters.

The recent fall in inflation came on the back of decline in crude oil prices and softening of food inflation.

The RBI retained the GDP growth rate for 2018-19 at 7.4 % and estimated growth rate of 7.5 % for the first half of the next financial year.

The boost credit flows, the RBI has decided to reduce the statutory liquidity ratio (SLR) requirements for banks to 18 % of their net demand and time liabilities from 19.5 % over the next six quarters(beginning January 2019), by 25 bps each in every quarter.

Key terms

Liquidity adjustment facility (LAF): allows banks to borrow money from RBI through repurchase agreements. LAF consists of repo and reverse repo operations. This arrangement allows banks to respond to liquidity pressures and is used by governments to assure basic stability in the financial markets.

Repo rate: it is also known as the benchmark interest rate and it is the rate which the RBI lends money to the banks for a short term. If RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate similarly, if it wants to make it cheaper for banks to borrow money it reduces the repo rate.

Cash reserve ratio (CRR): banks are required to hold a certain proportion of their deposits in the form of cash. This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR. currently the CRR is 4%.

Statutory liquidity ratio: banks are required to maintain at the close of business every day,a minimum proportion of their NDTL (net demand and time liability) as liquid assets in the form of cash ,gold and free approved securities. The ratio of liquid assets to demand and time liabilities is known as statutory liquidity ratio(SLR) .currently the SLR is 19.5%.

Call rate: the interest rate applied to interbank loans, or loans between financial institutions.

Marginal standing facility (MSF): it is a special window for banks to borrow from RBI against approved government securities in an emergency situation like an acute cash short- age. MSF rate is higher than repo rate.

Bank rate: this is the long term rate(repo rate is for short term) at which central bank (RBI) lends money to other banks or financial institutions. Bank rate is not used by RBI for monetary management now. It is now same as the MSF rate.

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