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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. 

The repo rate has remained at 4% since the August 2020 MPC meeting.

Mr Shaktikanta Das, governor of RBI, said in his address that the MPC intends to continue with the accommodative stance for this financial year onto next year until it is necessary. This was done to “revive growth on a durable basis and mitigate the impact of covid-19 while ensuring  that inflation remains within the target going forward.”

The reverse repo rate also stands unchanged at 3.35%.

The members of the MPC voted unanimously in favour of the decision.

The RBI is maintaining the accommodative stance since February 2019 MPC meeting.

The meeting lasted for three days between February 3 and 5. The panel was headed by Mr Shaktikanta Das with other members of the panel: Dr. Shashanka Bhide, Dr. Ashima Goyal, Prof. Jayanth R. Varma, Dr. Mridul K. Saggar and Dr. Michael Debabrata Patra.

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

What is meant by accommodative stance?

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

The MPC has decided to continue with this stance “at least during the current financial year and into the next financial year – to revive growth on a durable basis and mitigate the impact of COVID19 on the economy while ensuring that inflation remains within the target going forward.”

Even as the central government and the central bank have worked for hand in hand to revive the economy and provide financial support, the economy still recovering from the covid-19 impact with rising cases. Inflation continues to be inching higher as well.

Therefore RBI decided to remain status quo on the rates and await inflationary pressures to ease before it takes any action to fuel growth. RBI requires more headroom to deal with policy measures. Hence, the accommodative stance.

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 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 in case there is an emergency situation 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 December 2020, for the first time in at least 12 months, the inflation rate had fallen below the RBI mandated band of 2-6%. Among many other reasons, “a sharp fall in key vegetable prices” aided the fall in the inflation rate.

“It is expected that vegetable prices will remain soft in the near-term, while pressures may continue to persist in certain key food items,” said the MPC.

While the MPC’s outlook on food prices remains favourable, its outlook on core inflation looks dismal. 

What is core inflation?

Core inflation excludes the calculation of volatile factors like fuel and food prices.

Fuel Prices

The RBI recognises the rise in fuel prices. The skyrocketing fuel prices coupled with high levels of indirect taxes on the product by both the Centre and the States remain a cause of concern. This warrants “concerted policy action’ by both governments to control cost-push pressures.

Taking into consideration all these factors, RBI expects inflation at 5.2% for January to March quarter of the current financial year, 5.2-5% between April to September 2021 and 4.3% for the third quarter of the next financial year.

Growth

According to the MPC, metrics like consumer confidence, manufacturing and services, infrastructure, sales of residential units in metro cities are reviving. The vaccination drive has also provided an impetus for growth. Recently, upon completion of 10 lakh vaccinations, India became topped the list of speed in vaccinating its citizens.

The pace with which road and transport construction has picked has also caught the eye of the MPC.

Taking these and a few other factors into consideration the MPC has projected India’s growth for the next financial year at 10.5%. RBI’s projection is almost in-line with the estimate of 11% mentioned in the economic survey.

Retail Investor Online Access to Gilt Securities

The RBI has taken several measures to expand the scope of financial markets. RBI will provide retail investors with online access to the government securities market – both primary and secondary – directly through the Reserve Bank (‘Retail Direct’).

This will benefit the economy and investors in the following ways:

  • Broaden the investor base.
  • Retail investors will now have enhanced access to participate in the government
    securities market.
  • This, along with a few other measures, will upset the government’s borrowing programme in 2021-22.

Setting up of 24×7 Helpline for Digital Payment Services

RBI is setting up a centralised industrywide 24×7 helpline for addressing customer queries in respect of various digital payment products and give information on available grievance redress mechanisms.

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