RBI‘s Monetary Policy Committee (MPC) decided to keep the key repo rate unchanged at 6.50 percent and other monetary policy rates remained unchanged. “The Monetary Policy Committee has unanimously decided on 6.50 percent with readiness to act if the situation warrants,” Das said. The RBI governor also said that the withdrawal of accommodation and hike in the repo rate has been put on hold only for this meeting.
The repo rate is the interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks. Repo is short for Repurchase Agreement or Repopurchasing Option. Banks obtain loans from the Reserve Bank of India (RBI) by selling qualifying securities. The current repo rate in India set by the RBI is 6.50% on February 8, 2023.
The central bank or RBI and the commercial bank would reach an agreement to buy back the securities at a fixed price. When banks are short of funds or need to maintain liquidity in volatile market conditions, it’s done. Repo rate is used by RBI to control inflation.
Once the RBI raises the repo rate, commercial banks have to pay out more money to borrow from the central bank. Banks, in turn, pass on this higher interest rate to their customers. This means an increase in interest rates on deposits and loans provided by banks. While customers get a higher return on depositing their savings, they also pay more for existing and new loans. In reality, the money circulating in the economy, also known as liquidity, is decreasing. As a result, demand for consumption (houses, cars, etc.) falls. This in turn helps to reign in retail inflation.
At a time of falling inflation, the RBI starts reducing repo rates to increase the money supply in the economy. There is usually a time lag between the transmission of rates to the end customer. This happens because banks start adjusting their interest rates in response to RBI’s policy decisions. It usually takes 2-3 months for the rates to reach the borrower.