Status quo on repo rate
The RBI (Reserve Bank of India) left its benchmark interest rate, the repo rate, unchanged in its policy meeting on June 7, 2016. The repo rate stands for repurchase option rate and is the key monetary policy rate for the RBI. This is the rate at which the RBI lends to commercial banks. The reverse of this rate—that is, the rate at which banks park money with the central bank—is known as the reverse repo rate.
A change in the repo rate signals an increase or a decrease in rates to commercial banks (IBN) (HDB). Other rates, like the reverse repo rate and the MSF (marginal standing facility), are fixed against the repo rate. The rate impacts the movement of the rupee, which impacts the revenue of exporters (TTM). This affects India-focused funds (ETGIX) (INDA), as well.
The RBI has decided to leave the repo rate at 6.5%, the reverse repo rate at 6%, and the MSF rate and the bank rate at 7%.
In India, policy meetings are held once every two months. During the previous meeting in April 2016, the RBI slashed the repo rate by 25 basis points.
The decision to leave rates unchanged was not very surprising. Although there were calls for a further reduction in the repo rate from some market segments, most economists expected the RBI to stand pat on the key policy rate.
In this series, we’ll see why the RBI remained unmoved on its key policy rate and what lies ahead for India’s central bank in terms of its stance on monetary policy. We’ll begin by discussing what led to the unchanged repo rate in the next part of this series.