Repo rate –
The repo rate is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks in the event of any shortfall of funds. It is used by Reserve bank of India (RBI) to control inflation. A reduction in repo rate will helps banks to get money at a cheaper rate and an increase in repo rate will make bank borrowings from RBI more expensive.
If RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate and money supply decreases. On the other hand, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.
Banks takes loans from the Reserve Bank of India (RBI) by selling securities. The Reserve Bank of India RBI and the commercial bank would reach to an agreement to repurchase the securities at a set price. When banks are short on funds or need to maintain liquidity under volatile (unstable) market. Currently Repo rate is @ 6.25%.

Reverse Repo rate –
Reverse repo rate is the rate at which the Reserve Bank of India (RBI) borrows money from commercial banks within the country. Currently reverse repo rate is @ 3.35%.
There are also other policy rates, like Marginal Standing Facility Rate 6.25% and liquidity adjustment facility which are often directly linked with the repo rate.

What is Monetary Policy Committee and its responsibility?
Monetary Policy Committee (MPC) is constituted under the RBI Act of 1934 by the Central Government. The first meeting of Monetary Policy Committee (MPC) was conducted on 3rd October 2016. The committee determines the required interest rate to achieve the inflation target. The quorum for the meeting of the MPC is four members. Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a casting vote. Each Member of the Monetary Policy Committee (MPC) writes a statement specifying the reasons for voting in favour of, or against the proposed resolution.

There are various other instruments that are used for implementing monetary policy.

• Standing Deposit Facility (SDF) Rate: This is a monetary tool which allows banks to park their
excess liquidity
with RBI. This tool helps to absorb excess liquidity in the market.

• Marginal Standing Facility (MSF) Rate: This facility helps banks to borrow funds from RBI
at specified % (currently it is 6.25%).

• Liquidity Adjustment Facility (LAF): this is monetary tool which helps banks to borrow money in
case of any emergency or for adjusting in their Statutory Liquidity Ratio (SLR) or Cash Reserve Ratio (CRR).

• Bank Rate: The bank rate is the rate of interest which is charged by a central bank while
lending loans to a commercial bank.

• Cash Reserve Ratio (CRR): The Cash Reserve Ratio (CRR) is the percentage of total deposits a
bank must have in cash to operate risk-free. The Reserve Bank of India decides the amount and is kept with them.
The bank cannot use this amount for lending and investment or other purposes. Bank doesn’t get any interest from
the RBI for these reserves.

• Statutory Liquidity Ratio (SLR): It is basically the reserve requirement that banks is expected
to keep before offering credit to customers. The SLR is fixed by the Reserve bank of India (RBI) and this is
basically a type of control over the credit growth in India. The government uses the SLR for the purpose of
regulation of inflation and fuel growth.

Accommodative Policy:
This policy describes that keeping the repo rate low to increase the money supply in the economy as it is an
expansionary policy and this policy is framed to keep employment steady during an economic crisis.

Example:
• One Federal Reserve System pursuing an accommodative monetary policy occurred in 2008 in response to the
financial crisis. At that point, the unemployment rate was about 6.5% and rising while inflation was at about
2%. The Fed’s Open Market Committee decided to push short-term interest rates close to zero through quantitative
easing to prevent a more serious economic decline.

Example:
• During the start of the COVID-19 pandemic (2020), the Fed used its accommodative policy to prevent its economic
collapse due to the shutdown.

Effect of repo rate on inflation and recession?
a) Inflation: During inflation, RBI increases repo rate to disincentive banks to borrow from central bank, this
will reduce money supply in the economy and economy came out of inflation phase.
b) Recession: During recession, RBI decreases repo rate to incentivise banks to borrow from central bank, this
will increase money supply in the economy and economy came out of Recession phase.

CIRCULAR REGARDING REPO RATE IN DECEMBER
RBI/2022-23/148
DOR.RET.REC.88/12.01.001/2022-23

• The Announcement made by Monetary Policy Committee (MPC) in the month of December 2022 that the repo rate has
been increased by 35 basis points and which causes the repo rate increased from 5.90% to 6.25%, but the Monetary
Policy Committee (MPC) has decided to keep the reverse repo rate unchanged at 3.35%.
• As the reason of increasing repo rate in 7 December to reduce money supply in the economy and reduce inflation.
• The decision of this announcement was taken by the RBI’s six-member Monetary Policy Committee (MPC) by 5-1
majority. The RBI also voted for continuing the withdrawal of its accommodative policy, which means that
Monetary Policy Committee (MPC) could make a further increase in upcoming months of upcoming year of 2023.
• As this will create problems for persons raising home loans as interest rates of loans increased due to repo
rate increase and reduce investor’s interest in taking risk and reduce their investment. This new repo rate
announcement will reduce growth of economy.

Written by
PARAS BHARDWAJ
Articled Clerk