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GA Topper Series: RBI Monetary Policy

RBI hikes repo rate by 50 bps as inflationary pressures intensify.

In the recent bi-monthly monetary policy, it was decided to increase the repo rate by 50 basis points. 

The following are the various rates 

  • Repo rate: 4.9 %
  • Reverse repo rate:  3.75%
  • Standing deposit facility (SDF) rate: 4.65 %
  • Marginal standing facility (MSF) rate: 5.15 %
  • Bank Rate: 5.15 %

The MPC also decided unanimously to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth. This means the increase in repo rates will remove the accommodative stance of RBI.

Why was this step taken?

RBI under section 45Z of the RBI act has to control the inflation within the bracket of 2- 6 %. But India faced inflation of 7.8% in the past month. Thus to control the inflation, this repo rate hike.

How does this step affect the various aspect of the economy?

The Repo rate is the rate at which banks take loans from RBI. Thus increasing the repo rate it will make costlier for the banks to have funds to loan to the public. Thus resulting in the loan being costlier for the general public.  During a pandemic, RBI kept low repo rates so that people could get funds at a lower cost but this will not be the case now.

The increase in the repo will affect the liquidity of money. As it will be costlier to have loans this will reduce the demand for loans. Thus less money in the market. The reduction in the supply of money will pull down the inflation levels of the economy. This reduces the liquidity of money in the economy.

What are the reasons for inflation according to RBI?

The war in Europe is lingering and we are facing newer challenges each passing day which is accentuating the existing supply chain disruptions. As a result, food, energy, and commodity prices remain elevated. The war has led to the globalization of inflation.

How inflation rate is calculated by RBI?

The inflation rate will be based on the final combined Consumer Price Index [(CPI) base: 2010=100]. The final combined CPI will be used as reference CPI with a lag of three months. For example, the final combined CPI for September 2013 will be used as reference CPI for the whole of December 2013.

RBI Hikes Repo Rate Read In Hindi

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