RBI cuts repo rate by 25 bps to 6%, lowest in over 6 years

In RBI’s third bimonthly the Monetary Policy Committee (MPC) of the RBI has reduced short-term lending rate, or repo rate, by 25 basis points to 6%.

Policy Rates

Repo rate: Repo rate is the rate at which the central bank lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation. RBI has reduced the repo rate to 6% amid fall in food inflation to record low of 1.54%.

Reverse Repo Rate: It is the rate at which banks lend funds to the RBI. It was reduced by 25 bps to 5.75%.

Marginal Standing Facility (MSF) Rate: Marginal Standing Facility (MSF) rate refers to the rate at which the scheduled banks can borrow funds overnight from RBI against government securities. MSF is a very short term borrowing scheme for scheduled commercial banks. Banks may borrow funds through MSF during severe cash shortage or acute shortage of liquidity. It stands at 6.25%.

Bank Rate: It is rate charged by the central bank for lending funds to commercial banks. It was set to 6.25%. It influences lending rates of commercial banks. Higher bank rate will translate to higher lending rates by the banks.

Cash Reserve Ratio (CRR): It is the amount of funds that the banks have to keep with the RBI. It was unchanged at 4%. The RBI uses the CRR to drain out excessive money from the system.

Statutory Liquidity Ratio (SLR): It was unchanged 20%. Statutory liquidity ratio (SLR) is the Indian government term for reserve requirement that the commercial banks in India require to maintain in the form of gold, government approved securities before providing credit to the customers. Statutory Liquidity Ratio is determined by Reserve Bank of India maintained by banks in order to control the expansion of bank credit.

About Monetary Policy Committee (MPC)

Six-member MPC was constituted in September 2016. Out of six members govt. Will nominate three except the govt. Officials. Other three members will be from RBI including Governor and deputy governor. Governor will serve as the chairman of the committee. The MPC will serve for 4 years and not eligible for reappointment.  They will decide through the vote and Governor do not enjoy the veto power.

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Source The Hindu