By The Reserve Bank of India’s (RBI) Monetary Policy Committee recently made significant decisions during its ongoing three-day meeting. Under the guidance of RBI Governor Shaktikanta Das, the committee opted to maintain the report unchanged. This decision brought considerable relief to the public ahead of the elections. Governor Shaktikanta Das elaborated on the meeting’s decisions, confirming that the repo rate remains stable at 6.5 percent.
Understanding RBI’s Monetary Policy: Definitions of Repo Rate, Reverse Repo Rate, and Monetary Policy
The three-day meeting of the RBI’s Monetary Policy Committee concluded with key decisions announced by Governor Shaktikanta Das. The report remained unchanged, signaling continuity in the country’s monetary stance. Furthermore, there will be no adjustments to consumers’ EMIs on bank loans. This announcement comes as the first monetary policy decision for the fiscal year 2024-25. The RBI regularly issues monetary policy updates every two months to manage inflation, focusing primarily on repo and reverse repo rates.
The monetary policy, as managed by the central bank RBI, regulates the circulation of money in the market. By controlling cash flow, the policy aims to moderate purchasing power, subsequently curbing demand and reducing inflation. However, there are inherent risks, necessitating a delicate balance. The RBI ensures a consistent cash flow to prevent a sharp decline in demand that could halt economic growth. This process involves a periodic review of the repo and reverse repo rates by the Monetary Policy Committee, a six-member body convened by the RBI.
Repo rate refers to the interest rate at which commercial banks borrow funds from the RBI. Commercial banks play a crucial role in managing money flow in the market, with the RBI acting as a facilitator. As banks rely on the RBI for currency notes, the repo rate serves as a pivotal tool in monetary policy management, currently standing at 6.50 percent.
Conversely, the reverse repo rate pertains to the interest rate paid by the RBI to banks when they deposit surplus funds. Banks lend excess funds to the RBI, which in turn pays them interest, known as the reverse repo rate. This rate adjustment mechanism helps regulate liquidity in the banking system, ensuring stability in the financial market.
