RBI Governor Shaktikanta Das announced that the Monetary Policy Committee (MPC) has decided to keep the policy repo rate unchanged at 6.5 per cent. He also stated that retail inflation remains above the targeted 4 percent, causing a need for a balanced approach towards monetary policy. The RBI also revised its growth projections for the current financial year to 7.2 per cent, with risks to the outlook being evenly balanced. Das emphasized the importance of maintaining a disinflationary approach and aligning inflation with the target in order to sustain price stability and support economic growth.
Reserve Bank of India's Repurchase Agreement and Monetary Policy
Background
The Reserve Bank of India (RBI) is the central bank of India responsible for managing the country's monetary policy. One of its key tools is the repurchase agreement (repo), which is a short-term money market instrument used to regulate liquidity in the banking system.
Through repo operations, the RBI lends money to commercial banks by purchasing government securities and agreeing to repurchase them at a predetermined price and maturity date. By adjusting the repo rate, the central bank can influence the cost of borrowing for banks, which in turn affects interest rates for businesses and consumers.
Recent Developments
On August 5, 2023, RBI Governor Shaktikanta Das announced the decision of the Monetary Policy Committee (MPC) to keep the policy repo rate unchanged at 6.5%. This decision was based on an assessment of the current economic situation, including:
The RBI also revised its growth projections for the current financial year to 7.2%, with risks to the outlook being evenly balanced.
Top 5 FAQs and Answers
1. What is the impact of repo rate on the economy?
Changes in repo rate affect the cost of borrowing for banks and businesses, which can influence interest rates on loans and investments, economic activity, and inflation.
2. Why is the RBI maintaining a disinflationary approach?
The RBI aims to bring inflation back within the target range of 2-6% to ensure price stability and support sustained economic growth.
3. What are the risks to the current economic outlook?
Risks include geopolitical tensions, supply chain disruptions, and potential downside risks to global growth.
4. How does the RBI regulate liquidity in the banking system?
The RBI uses various tools such as repo operations, open market operations, and variable reserve ratio to manage liquidity and ensure financial stability.
5. What is the difference between a repo and a reverse repo?
In a repo, the RBI buys securities from banks, while in a reverse repo, the RBI sells securities to banks, resulting in opposite liquidity effects on the banking system.
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