From UPSC perspective, the following things are important :
Prelims level : Repo and Reverse Repo
Mains level : Monetary Policy of the RBI
- The RBI cut its repo rate, or the rate at which it lends to banks, by 25 basis points to 6 per cent.
What is Repo Rate?
- REPO denotes Re Purchase Option – the rate by which RBI gives loans to other banks.
- In other words, it is the rate at which banks buy back the securities they keep with the RBI at a later period.
- Bank gives loan to the public at a higher rate, often 1% higher than REPO rate, at a rate known as Bank Rate.
- RBI at times borrows from banks at a rate lower than REPO rate, and that rate is known as Reverse REPO rate.
Why a cut?
- The key consideration for the RBI has shifted from inflation to growth and analysts are betting on the lower inflation rate as well as slower growth in the economy to spur the decision to slash rates.
- In its last policy review in February, the MPC had shifted the monetary policy stance to ‘neutral’ from ‘calibrated tightening’.
Implications for Consumers
- For retail consumers, a cut in rates could have a two-pronged impact. For depositors, new deposits will earn a lower rate and thereby lower returns.
- For borrowers, though, a downward movement of interest rate would bring down the interest outgo in the near future.
Monetary Policy Committee