Fourth Bi-monthly monetary policy review

News:The Monetary Policy Committee of the Reserve Bank of India(RBI) has cut the key policy rate by 25 basis points to 5.15 %.

Facts:

Highlights of the Monetary policy:

• The Reserve Bank of India’s(RBI) Monetary Policy Committee(MPC) has decided to reduce the policy repo rate under the liquidity adjustment facility(LAF) by 25 basis points to 5.15 % from 5.40 %.
• Consequently,the reverse repo rate under the LAF also stands reduced to 4.90 %.
• The MPC has also decided to continue with an accommodative stance as long as it is necessary to revive growth while ensuring that inflation remains within the target.
• RBI has also revised its growth forecast for the current financial to 6.1% from 6.9% projected in the August policy.
• Further,the growth forecast for the first quarter of the next financial year was also reduced to 7.2% from 7.4%.

Additional information:

About Monetary Policy Committee(MPC):

• The Monetary Policy Committee(MPC) is a committee of the Reserve Bank of India.
• The MPC is made up of six members with three nominated by the Union government and three representing the RBI.
• The MPC is mandated by law to ensure that retail inflation stays within a band of two percentage points of the target inflation rate of 4%.

About Liquidity Adjustment Facility (LAF): 

• LAF allows banks to borrow money from RBI through repurchase agreements.
• LAF consists of repo and reverse repo operations.This arrangement allows banks to respond to liquidity pressures and is used by governments to assure basic stability in the financial markets.

Repo rate:

• Repo rate is also known as the benchmark interest rate and it is the rate at which the RBI lends money to the banks for a short term. 

Reverse Repo rate: 

• Reverse repo rate is the short term borrowing rate at which RBI borrows money from banks.