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Monetary Policy: RBI cuts repo rate by 25 bps to 5.75%

Date: 07 June 2019 Tags: Monetary Policy & RBI

Reserve Bank of India (RBI) in its second bimonthly monetary policy review for financial year 2019-20 has cut the repo rate by 25 basis points(bps) or 0.25% to 5.75%. This decision was unanimously taken by RBI’s six-member Monetary Policy Committee (MPC) headed by RBI Governor Shaktikanta Das in 6-0 vote.  It also changed its monetary policy stance to “accommodative” from “neutral” stating that “there is scope to accommodate growth concerns and reinvigorate private investment activity”. It was third such rate cut of 25 basis points in calendar year 2019. With this, RBI’s main policy rate now stands at level touched almost nine years ago in July 2010. It also lowered its growth forecast to 7% for 2019-20 from the April view of 7.2%.

Policy Rates

  • Repo rate (repurchase rate): It was changed by 25 basis points to 5.75%.
  • Reverse Repo Rate: It was changed by 25 basis points to 5.50%.
  • Marginal Standing Facility Rate: It was changed by 25 basis points to 6.0%.
  • Bank Rate: It was changed by 25 basis points to 6.0%.

Key Terms

Repo rate (repurchase rate)

  • It is rate at which RBI lends to banks for short periods against government securities. Its objective is to inject liquidity in the system.
  • Increase in repo rate squeezes liquidity out of system and increase interest rates, which will then reduce demand for funds and reduce inflation.
  • Similarly, when decreased, it injects liquidity in system making it cheaper for banks to borrow money.
  • This is done by RBI by buying government securities/bonds from banks with agreement to sell them back at fixed rate.

Reverse repo

  • It is rate at which banks lend funds to RBI or RBI borrows funds from other banks in short term.
  • This is done by RBI selling government securities/ bonds to banks with commitment to buy them back at future date.

Marginal Standing Facility (MSF)

  • It is rate at which scheduled banks can borrow funds overnight from RBI against government securities, if later doesn’t have the required eligible securities above SLR limit. It is very short term borrowing scheme for scheduled banks to meet.

Bank Rate

  • It is rate charged by RBI for lending funds to commercial banks. It influences lending rates of commercial banks. Higher bank rate results in higher lending rates by banks. RBI can resort to raising the bank rate in order to curb liquidity and vice versa.

Cash Reserve Ratio (CRR)

  • It certain percentage of total deposits that commercial banks are required to maintain in form of cash reserve with central bank. RBI uses it to drain out excessive money from system. This money earns no interest.

Statutory Liquidity Ratio (SLR)

  • It is portion of bank deposits that banks have to maintain or invest in government bonds in form of liquid assets like cash, gold and unencumbered securities, treasury bills, dated securities etc. It has to be maintained at close of business on every day. RBI does not pay any interest to banks for SLR.