Why is it in the news?
- The Reserve Bank of India’s Monetary Policy Committee (MPC), which is scheduled to meet from June 5 to 7, is expected to keep the repo rate steady at 6.5 per cent as sticky food inflation continues to remain a threat to the inflation.
More about the news:
Reasons to Keep Repo Rate Unchanged:
Monetary Policy Committee:
- The Finance Act of 2016 amended the Reserve Bank of India Act, 1934, introducing a statutory framework for the Monetary Policy Committee (MPC).
- According to Section 45ZB of the revised RBI Act, the central government has the authority to establish a six-member MPC.
- The primary function of the MPC is to determine the benchmark policy rate (repo rate) aimed at maintaining inflation within the designated target range.
- Composition: The Monetary Policy Committee (MPC) comprises six members, including the RBI Governor (as Chairperson), the RBI Deputy Governor overseeing monetary policy, one nominee from the RBI Board, and three representatives appointed by the Government of India.
- External members serve a four-year term.
- For a meeting to proceed, a quorum of four members is required, with either the Governor or the Deputy Governor, who is an MPC member, present.
- Decisions of the MPC are made by a majority vote, with the RBI Governor having a casting vote in case of a tie.
- The MPC’s decisions are binding on the RBI.
| Repo rate:
· Definition: The repo rate denotes the interest rate at which the central bank extends funds to commercial banks. · Liquidity Regulation: The Reserve Bank of India (RBI) employs the repo rate as a tool to regulate liquidity within the economy. · Banking Relationship: Repo rate is closely linked with banking mechanisms such as ‘repurchase options’ or ‘repurchase agreements’. · Monetary Policy Tool: Repo rate adjustments are used by the central bank to control inflation and enhance bank liquidity. · Rate Changes Impact: An increase in repo rate aims to control prices and borrowing, while a decrease stimulates economic growth. o Changes in repo rate affect public borrowings, including home loans and EMIs. o Unchanged repo rate typically shows steady interest rates on loans offered to consumers and businesses.
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