REPO RATE – UNCHANGED AT 4%

Related Articles

India-Korea Electronic Origin Data Exchange System (EODES)

December 10, 2023

Biosphere Reserve

November 3, 2023

Cheetahs in India

September 29, 2023

• Recently, for the eleventh time in a row, the Reserve Bank of India (RBI) in its latest Monetary Policy review has decided to keep the main policy rate – Repo rate – unchanged at 4%.
• It has also retained its accommodative stance, but indicated it will engage in a gradual and calibrated withdrawal of surplus liquidity to rein in inflation. 

Significance :

• Acknowledging the Impact of Russia-Ukraine War: In the wake of the rise in crude oil and commodity prices and the impact of the Russian invasion of Ukraine, RBI has slashed the growth forecast to 7.2% for fiscal 2022-23 from 7.8% projected earlier.
• The Russia-Ukraine war could potentially impede the economic recovery through elevated commodity prices and global spill-over channels.
• The RBI also introduced a new measure, the Standing Deposit Facility — an additional tool for absorbing liquidity — to suck out surplus liquidity of Rs 8.5 lakh crore from the financial system which is fuelling inflation.
• This Monetary Policy Review signals that the RBI has finally shifted its priorities to tackle inflation
• Thus, there is a possibility of a hike in its key policy rate (Repo Rate) in the coming months.
• Further, RBI has hiked its inflation forecast from 4.5% projected earlier to 5.7% still below the upper band of 6% of the RBI’s target – in 2022-23.
• RBI policy panel took a concrete step by restoring the policy rate corridor under Liquidity Adjustment Facility(LAF) to pre-pandemic width of 50 basis points.
• This is aimed at bringing down the inflationary pressures.
• LAF is a tool used in the monetary policy that allows banks to borrow money from the RBI through repurchase agreements (Repo) or to lend funds to the RBI through reverse repo agreement.

Standing Deposit Facility & Its Role

• The RBI has introduced the Standing Deposit Facility (SDF), an additional tool for absorbing liquidity, at an interest rate of 3.75%.
• It is an additional tool for absorbing liquidity without any collateral.
• In 2018, the amended Section 17 of the RBI Act empowered the RBI to introduce the SDF.
• By removing the binding collateral constraint on the RBI, the SDF strengthens the operating framework of monetary policy.
• The SDF is also a financial stability tool in addition to its role in liquidity management.
• The SDF rate will be 25 bps below the policy rate (Repo rate), and it will be applicable to overnight deposits at this stage.
• It would, however, retain the flexibility to absorb liquidity of longer tenors as and when the need arises, with appropriate pricing.
• The “extraordinary” liquidity measures undertaken in the wake of the pandemic, combined with the liquidity injected through various other operations of the RBI, have left a liquidity overhang of the order of Rs 8.5 lakh crore in the system.
• The main purpose of SDF is to reduce the excess liquidity in the system, and control inflation.
• The RBI will engage in a gradual and calibrated withdrawal of this liquidity over a multi-year time frame in a non-disruptive manner beginning this year.

SOURCE: THE HINDU,THE ECONOMIC TIMES,MINT