Reserve Bank of India’s (RBI) monetary policy committee (MPC) on Monday began its three-day deliberations to decide the next policy even as there are indications that due to the growing threat of the Omicron variant of Coronavirus, it may be forced to postpone any change in key rates and maintain status quo.
The central bank head Shaktikanta Das will announce the committee’s decision on the repo and reverse repo rates on Wednesday, December 8.
If the rates remain unchanged after the MPC meeting, then this would be the ninth consecutive time when this will happen.
The rates were last revised by RBI on May 22, 2020, when it had reduced interest rates to a historic low.
Shanti Ekambaram, Group President – Consumer Banking, Kotak Mahindra Bank Limited, while commenting on the monetary policy committee’s deliberations, said, “with the economy on an upswing, led by a surge in consumer demand and ample liquidity, it was expected that the MPC would opt for gradual withdrawal of excess liquidity and a change in its accommodative stance in the December policy. However, the looming threat of Omicron and the uncertainty that it has set in motion means that it is now likely that the committee will keep key rates unchanged. A move on the reverse repo rate, which was largely expected in December, will now be postponed to the next calendar year.”
While there is so much talk about repo rates and reverse repo rates, let us find out what exactly they mean and how the economy is impacted by these rates.
Repo rate refers to the rate at which commercial banks borrow money by selling their securities to the RBI, to maintain liquidity, in case of shortage of funds or due to some statutory measures. It is one of the main tools of RBI to keep inflation under control.
Currently the repo rate is at 4 per cent and the reverse repo rate is at 3.35 per cent.
Reverse Repo Rate
Reverse repo rate is a tool to absorb liquidity in the market, thus restricting the borrowing power of investors.
It is the rate at which RBI borrows money from banks. It is normally lower than the repo rate and is used to manage cash-flow.