RBI cuts repo rate by 40 bps

The Reserve Bank of India has cut the repo rate by 40 basis points from 4.4% to 4%.  The reverse repo rate has been kept at 3.35% to maintain accommodative stance; Two key policy rates meant to tell the banks to not park their money with the central bank and instead lend more to corporate and individuals. the measures were meant to maintain adequate liquidity in the system and its constituents in the face of covid-19 related dislocations; facilitate and incentivise bank credit flows; ease financial stress; and enable normal functioning of markets.

  • Domestic economic activity impacted severally by lockdown, the central bank governor observed adding that high frequency indicators point to collapse in demand.
  • Investment demand has virtually been halted. The biggest blow from COVID-19 is to private consumption.
  •  Headline inflation may remain firm in H1 and fall in H2 of FY21.
  • GDP growth in 2020-21 expected to remain in negative territory

                                   LEARNING WITH TIMES: BASICS

  • The Reserve Bank of India is the supreme monetary and banking authority in the country. It keeps the cash reserve of all scheduled banks and hence is known as Reserve Bank. It was established on April 1, 1935  . Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India. Its main function includes; formulate, implements and monitors the monetary policy, prescribes broad parameters of banking operations within which the country’s banking and financial system functions, Manages the Foreign Exchange Management Act, 1999, Issues and exchanges or destroys currency and coins not fit for circulation, Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker. RBI Governor SHAKTIKANTA DAS

BANK RATE: It is a rate of interest at which the central bank lends money to the lower bank. It is a quantitative method of credit control.

REPO RATE:  Also known as repurchased auction. When there is liquidity shortage, government repurchases government securities and payment is made to banks. It adds liquidity to market.It simply means repo rate is the rate at which RBI lends money to commercial banks against the pledge of government securities whenever the banks are in need of funds to meet their day-to-day obligations.

REVERSE REPO RATE: When the government sell dated government securities to banks to suck considerable liquidity in the market. Both repo and reverse repo rates are liquidity Adjustment Ratio (LAR).

INFLATION: It is an economic condition in which prices of goods and services rises and value of money falls or money circulation exceeds the production of goods and services.

DISINFLATION:  It refers to a situation in which prices are brought down moderately from its higher level without any adverse impact on production and employment.

MONETARY POLICY: Monetary policy is the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rate and is used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity. Monetary policy can be expansionary and contractionary in nature. Increasing money supply and reducing interest rates indicate an expansionary policy. The reverse of this is a contractionary monetary policy.