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The Reserve Bank of India left the repo rate unchanged at 4% in its monetary policy committee meeting. The MPC maintains an accommodative stance. This was the second MPC meeting of the financial year 2021-22. The repo rate has remained at 4% since the April 2019 MPC meeting.

Other quick highlights:

  • The RBI aims to maintain the inflation rate between 2 to 6%.
  • The reverse repo rate also stands unchanged at 3.35%.
  • The members of the MPC voted unanimously in favour of the decision.
  • The marginal standing facility (MSF) rate and the Bank Rate are at 4.25%.
  • The RBI is maintaining the accommodative stance since February 2019 MPC meeting. 

The meeting lasted for three days, between June 2 and 4, 2021. Mr Shaktikanta Das headed the panel with other members: Dr Shashanka Bhide, Dr Ashima Goyal, Prof. Jayanth R. Varma, Dr Mridul K. Saggar and Dr Michael Debabrata Patra.

What is Monetary Policy Committee(MPC)?

MPC is a six-member panel that assesses the condition of macroeconomic situations. On the final day of the MPC meeting, the MPC decides upon various factors for the economy and issues for the public.

What is meant by an accommodative stance?

An accommodative stance means that there is room for lowering interest rates in the future to revive growth and demand in the economy.

The MPC has decided to continue with this stance till India can tackle the impact of the global pandemic on our domestic economy. This has to be done to ensure that inflation remains within RBI’s 2-6% target band.

Why Did RBI Not Change The Policy Rates?

India’s GDP for FY21 contracted at -.7.3%. While signs of a normal southwest monsoon and global recovery momentum may support domestic economic activity, the spread of covid-19 infection in rural and urban areas continue to pose risks.

The lowering of inflation in April was a relief, but rising fuel prices may adversely impact the coming days. Inflation, measured by the consumer price index (CPI), eased to 4.29% in April 2021. This is lower than 5.52% in March 2021.

Keeping such factors in mind, MPC was of the view that the economy requires policy support.

Policy Rates
Repo Rate 4%
Reverse Repo Rate 3.35%
Marginal Standing Facility 4.25%
Bank Rate 4.25%

What does this mean for you?

MPC maintaining the repo rates at 4% means that the rate at which banks borrow money from the central bank remains as is. Generally, when RBI lowers the repo rate, commercial banks are supposed to lower the interest rates they offer on loans given to you.

Interest rates are decided in consonance with the inflation in the economy. 

Terms to Know

Repo Rate

Repo rate is the rate at which banks borrow money from the RBI.

Reverse Repo Rate

The reverse repo rate is the rate at which the RBI borrows money from banks.

Marginal Standing Facility

MSF is the rate at which banks borrow overnight funds from the RBI. This window has been created for the banks if there is an emergency when inter-bank liquidity dries up and overnight interest rates are volatile. The rate is higher than the repo rate.

Bank Rate

Bank rate is the rate at which RBI lends money to commercial banks without any security.

MPC’s Outlook on Growth and Inflation

Inflation
In the coming few days, RBI is expecting a pretty uncertain roadmap for India’s inflation levels. While Rising fuel prices and continuing high state taxes on fuel will increase inflation levels, there are multiple factors like a normal forecast for monsoon and declining infections that may keep price levels in check. RBI expects CPI to be at 5.1% during the financial year 2021-22.

Growth
RBI expects India to grow at 9.5% during FY21-22. Keeping in mind demand, both rural and urban, may revive with vaccination drives and covid-compatible business models and global recovery’s support to the export sector. The central bank expects that “normal” economic activity may pick up.

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