RBI Monetary Policy Unchanged Repo Rate at 6.5 %

The Reserve Bank of India's (RBI) Monetary Policy Committee, led by Governor Shaktikanta Das, has decided to maintain the key policy repo rate at 6.5%. This is the fourth consecutive meeting in which the committee has chosen to keep the rate unchanged. 

• The MPC had last increased the rate from 6.25% to 6.5% in February 2023. During the bi-monthly monetary policy meeting, Governor Das announced that the transmission of a 250 bps repo rate cut still needs to be completed. 
• The Real GDP growth projection for FY24 remains at 6.5%, and inflation is projected at 5.4%, the same as before. Governor Das emphasized the importance of preventing food and fuel price shocks. 
• He also stated that the RBI may need to consider open market operations (OMO) about Government securities (G-secs) to manage liquidity. The post-monetary Policy press conference was held after that.

Key terms of Policy Rates

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

Standing Deposit Facility (SDF) Rate: The Reserve Bank accepts uncollateralized deposits overnight from all LAF participants at a specific rate known as the SDF rate. The SDF rate is 25 basis points below the policy repo rate. Starting from April 2022, the SDF rate replaced the fixed reverse repo rate as the floor of the LAF corridor.

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

Liquidity Adjustment Facility (LAF): The LAF is a term used to describe the Reserve Bank's methods of injecting or absorbing liquidity into or out of the banking system. It includes overnight and term repo/reverse repos with fixed or variable rates and SDF and MSF. Along with the LAF, other tools for managing liquidity include outright open market operations (OMOs), forex swaps, and the market stabilization scheme (MSS).

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

Reverse Repo Rate: The Reserve Bank takes liquidity from banks by using eligible government securities as collateral under the LAF at a specific interest rate. With the introduction of SDF, the RBI will have the authority to decide on the fixed rate for reverse repo operations based on specific needs and objectives.

Bank Rate: The Bank Rate is the rate at which the Reserve Bank is willing to buy or rediscount bills of exchange or other commercial papers. Banks must pay a penalty rate for failing to meet their reserve requirements, including the cash reserve ratio and statutory liquidity ratio. 

Cash Reserve Ratio (CRR): Banks must maintain an average daily balance with the Reserve Bank, 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): Every bank operating in India must maintain assets with a value equal to at least a certain percentage of its total demand and time liabilities in India. These assets must be typically in the form of unencumbered government securities, cash, and gold.

Open Market Operations (OMOs): The Reserve Bank injects or absorbs durable banking liquidity by outright purchasing or selling government securities.

What is the Monetary Policy Committee?

• According to the amended RBI Act 1934, Section 45ZB, the Central government can establish a Public Policy Committee (MPC) of six members. This committee determines the policy interest rate necessary to achieve the inflation target. The inaugural MPC was formed on September 29, 2016.

Members of the MPC 

Of the 6 members, three are from RBI, and three are eminent economists.

Members from RBI are 

• Shaktikanta Das (Governor of RBI), Dr. Michael Debabrata Patra (Deputy Governor of RBI), Rajiv Ranjan (Executive Director of RBI) 

Eminent Economist are:

Dr Jayanth Verma, Dr Ashima Goyal and Dr Shashanka Bhide, As per the RBI Act, the MPC must meet a minimum of four times in a financial year.

Chairman of the MPC  

The chairman of the MPC is the RBI governor.