The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) meeting will begin today, March 3, or Wednesday. This meeting is scheduled to last through March 5. This will be the inaugural meeting for the 2024–25 fiscal year.
Experts predict that there won't be any changes to the RBI repo rate, or interest rate, at this meeting. At this moment, the repo rate stays at 6.50%. At its previous meeting in February, the RBI had decided against raising interest rates.
Six increases of 2.50% were made to the repo rate in the fiscal year 2022–2023.
Every two months, a meeting on monetary policy is held. April 2022 marked the first meeting of the fiscal year 2022–2023. After that, the RBI maintained the repo rate at 4%, but on May 2 and 3, it called an emergency meeting and raised the rate by 0.40% to 4.40%.
On May 22, 2020, the repo rate underwent this modification. Following this, the repo rate was raised by 0.50% during the meeting that took place on June 6 and 8. The repo rate went from 4.40% to 4.90% as a result. After that, it was raised by 0.50% in August to reach 5.40%.
In September, interest rates rose to 5.90%. The interest rates then rose to 6.25% in December. Subsequently, in February of the financial year 2022-2023 comes the final monetary policy meeting, where interest rates were raised from 6.25% to 6.50%.
Why does the RBI change the repo rate up or down?
The repo rate is one of the RBI's most effective tools for combating inflation. The RBI attempts to slow down the flow of money through the economy by raising the repo rate when inflation is extremely high. A high repo rate will result in a costly loan from the RBI to the banks. Banks will increase the cost of loans for their clients in exchange. The economy will see less money flow as a result. Demand and inflation will both decline if money flow declines.
In a similar vein, during a difficult economic period, more money needs to flow in order to recover. The RBI lowers the repo rate in these circumstances. As a result, banks are able to provide loans from the RBI at lower rates, and clients are also able to do so. Let's learn from this illustration. Demand declined as economic activity stagnated throughout the Corona period. By lowering interest rates, the RBI has enhanced the flow of money across the economy in such a circumstance.
What occurs when the reverse repo rate rises or falls?
The rate at which the RBI offers banks interest for holding money is known as the reverse repo rate. The reverse repo rate is raised by the RBI when it is necessary to decrease market liquidity. By earning interest on their assets held with the RBI, banks profit from this. When the economy is experiencing high inflation, the RBI raises the reverse repo rate. As a result, banks have less money available to lend to consumers.
