First Bi-Monthly Meeting of RBI’s Monetary Policy Committee Begins

The Monetary Policy Committee (MPC) of the Reserve Bank of India is currently holding its first meeting for the financial year 2024-25, from April 3rd to 5th, 2024. 

• The committee meets every two months to analyze the current economic situation, including inflation and growth, and to determine the repo rate - the interest rate at which the RBI lends short-term funds to commercial banks in India. 
• The repo rate is a key tool for the MPC to influence the overall money supply and interest rates in the economy, which are crucial for maintaining price stability (low inflation) and promoting economic growth. 
• The Reserve Bank last increased the repo rate to 6.5 percent in February 2023, and has since maintained the rate at the same level in its last six bi-monthly policies.

What is the Monetary Policy Committee?

As per the amended RBI Act 1934, Section 45ZB, a Public Policy Committee (MPC) consisting of six members can be established by the Central government. 

This committee is responsible for determining the policy interest rate required to meet the inflation target. The first-ever MPC was established on September 29, 2016.

Members of the MPC 

There are six members in the Monetary Policy Committee (MPC), three of whom are from the Reserve Bank of India (RBI) and the other three are eminent economists. 

• The RBI members are Shaktikanta Das (Governor of RBI), Dr. Michael Debabrata Patra (Deputy Governor of RBI), and Rajiv Ranjan (Executive Director of RBI). 
• The eminent economists are Dr. Jayanth Verma, Dr. Ashima Goyal, and Dr. Shashanka Bhide. 
• According to the RBI Act, the MPC is required to meet a minimum of four times in a financial year. The chairman of the MPC is the RBI governor.

Key terms of Policy Rates

Repo Rate: The Reserve Bank offers liquidity to its participants through the liquidity adjustment facility (LAF) against government and approved securities collateral at an interest rate.

Standing Deposit Facility (SDF) Rate: The Reserve Bank accepts overnight deposits without collateral from all LAF participants at a specific rate known as the SDF rate. The SDF rate is 25 basis points lower than the policy repo rate. As of April 2022, the SDF rate replaced the fixed reverse repo rate as the minimum interest rate for the LAF corridor.

Marginal Standing Facility (MSF) Rate: Banks have the option to borrow from the Reserve Bank at a higher rate for overnight loans by using their Statutory Liquidity Ratio (SLR) portfolio as collateral. The limit for this borrowing is 2 percent. This helps to prevent unexpected liquidity issues in the banking system. The Marginal Standing Facility (MSF) rate is set 25 basis points higher than the policy repo rate.

Liquidity Adjustment Facility (LAF): The term LAF stands for Liquidity Adjustment Facility, which refers to the methods used by the Reserve Bank to either inject or absorb liquidity from the banking system. This includes both overnight and term repo/reverse repos with fixed or variable rates, as well as SDF and MSF. In addition to LAF, other tools used to manage liquidity include outright open market operations (OMOs), forex swaps, and the market stabilization scheme (MSS).

LAF Corridor: The LAF corridor has a ceiling set as the marginal standing facility (MSF) rate and a floor set as the standing deposit facility (SDF) rate, with the policy repo rate in between.

Reverse Repo Rate: The Reserve Bank acquires liquidity from banks by accepting eligible government securities as collateral under the LAF at a particular interest rate. The RBI can now determine the fixed rate for reverse repo operations based on specific requirements and objectives with the implementation of SDF.

Bank Rate: The Bank Rate refers to the interest rate at which the Reserve Bank buys or rediscounts commercial papers and bills of exchange. Banks are required to maintain a certain amount of reserves including cash reserve and statutory liquidity ratio. If they fail to meet these requirements, they are charged a penalty rate.

Cash Reserve Ratio (CRR): Banks are required to maintain an average daily balance with the Reserve Bank, which is a percentage of their net demand and time liabilities (NDTL). This balance is calculated based on the last Friday of the second preceding fortnight, as notified by the Reserve Bank in the Official Gazette.

Statutory Liquidity Ratio (SLR): In India, every bank that operates must keep a certain percentage of its total demand and time liabilities in assets. These assets must be in the form of unencumbered government securities, cash, and gold.

Open Market Operations (OMOs): The Reserve Bank controls durable bank liquidity through buying or selling government securities.