What’s the repo rate?
The “repo rate” is a repurchase option rate. It’s a key monetary policy rate for the RBI (Reserve Bank of India)—India’s central bank. This is the rate at which the RBI lends to commercial banks. The “reverse repo rate” is the rate at which banks park money with the central bank. The rate is similar to the Fed’s federal funds rate.
A change in the repo rate signals a rise or fall in the rates to commercial banks. Other rates, like the reverse repo rate and the MSF (marginal standing facility) are fixed against the repo rate. While the reverse repo is 100 basis points lower than the repo rate, the MSF is 100 basis points higher than the repo rate.
Status quo in December 2015
The RBI board met on December 1, 2015, to decide on the course of monetary policy in India. It left the repo rate unchanged at 6.8%. The reverse repo and MSF remaining unchanged as well. In its previous meeting, the RBI aggressively reduced the repo rate by 50 basis points. At that time, the RBI made it clear that it was front loading a rate cut.
In this series, we’ll evaluate why India’s central bank didn’t reduce the repo rate more in its December meeting. We’ll analyze the possible consequences for India-focused mutual funds like the Matthews India – Investor Class (MINDX) and the Eaton Vance Greater India Fund – Class A (ETGIX). We’ll also analyze the impact on ADRs (American depositary receipts) of interest rate sensitive companies like ICICI Bank (IBN), HDFC Bank (HDB), and Infosys (INFY).
In the next part, let’s see how Indian equities reacted after the RBI’s December statement.